The Problems in the Formation of a New Overseas Portfolio

Abstract

The paper is divided into four sections, viz. :— (i) The objects and advantages that may accrue from the transaction of business in a country other than that in which an office is established are considered. Reference is made to the nature of the organisation needed in the overseas territory and to the resulting establishment costs. (ii) Observations are made concerning the level of premium rates, underwriting, and the classes of business to be transacted. The determination of a suitable rate of development is discussed and consideration is given to the nature of the agency organisation. The section concludes with a reference to the duties of the Principal Officer for the territory and the criteria by which progress would be periodically reviewed. (iii) In this section the financial aspects are examined. Consideration is given to a mutual office commencing with a local Head Office and with Branch offices in two centres at the outset, with a further branch to be opened subsequently. Two plans of new business development over fifteen years are considered and assumptions are made with regard to mortality, lapse and surrender. The premium income is calculated on these assumptions and an estimate is made of the administrative expenses year by year under each plan. The loadings provided by the premiums are then compared with the estimated expenses and tables are produced showing under each plan the excess expenses year by year. An investigation is thereafter made to ascertain the total expense and valuation strain. Two valuation bases are employed, namely, a net premium valuation and a modified net premium valuation. Hypothetical accounts are produced for both plans to show the emerging development costs year by year. The comparisons show the combined advantages of a satisfactory rate of new business production and a balanced and efficient agency force. Under both plans it is estimated that after twenty years the new territory could. be expected to be no longer in need of financial support. (iv) The effect of variations in the assumptions made in determining the development costs are referred to. Emphasis is placed on the importance of costing studies, with a regular review of progress.