>why the Expense Fee is not FIXED at this level, but goes
>from my $6.77 (without considering we offer increased
>limits coverage) to as high as $10.16?
The expense fee is not supposed to be the same thing as
the fixed expenses. The expense fee is meant to cover the
fixed expenses AND the variable expenses arising from the
fixed expenses. In this example these "variable expenses
arising from the fixed expenses" can be thought of like this:
There are $4.80 of fixed expenses, so when the variable
expense rate of 29.1% is applied it generates
an additional $1.40 (=29.1%*$4.80) of premium. The variable
expense rate would then have to be applied to the additional
$1.40 which would generate another $0.40 (29.1%*$1.40) of
premium, and so on...
The Variable Base rate is the rate that would be charged if
there were no fixed expenses. It is not, therefore, just $70.20
(=$75-$4.80) because the $75 includes variable expenses
generated by the premium to cover the fixed expenses.
The Variable Base Rate (VBR) should be the expected loss
plus the variable expenses if there were no fixed expenses.
The expected loss is just the Base Rate times the ELR.
The VBR is the premium charged if there are no fixed
expenses, so 29.1%*VBR gives the variable expenses if
there were no fixed expenses.
Therefore VBR= Base Rate/ELR+29.1%*VBR. Solving for
VBR, you get the formula VBR=Base Rate*ELR/CVEPR, since
(1-29.1%)=CVEPR.
-David