Insurance Expense Exhibit and the Allocation of Investment Income

The Insurance Expense Exhibit (lEE) provides a statutory allocation of investment income to lines of business, thereby measuring the underlying profitability of the insurance operations. Casualty actuaries must understand the allocation procedure, both for completing the Insurance Expense Exhibit of their own companies and for interpreting the results of their peer companies. Although the allocation procedure is strictly prescribed by the NAIC, the method is not shown on the lEE itself and the formulas are difficult to decipher from the lEE Instructions. This paper explains the philosophy underlying the allocation procedure, the adjustments made to various components, and the formulas that are used to determine the amount of investment income assigned to each line of business. In addition, the paper provides an illustration, enabling the reader to trace the steps of the allocation procedure, from the initial data elements to the final allocated amounts. The allocation of investment income to lines of business is a contentious issue, for which various methods are currently being used. The paper concludes with a comprehensive analysis of the pros and cons of the statutory allocation procedure prescribed in the lEE.