The New Manager of the Insurance Division Does Not Understand

question 13

Essay

The new manager of the insurance division does not understand how the company can have so many overhead rates for assigning costs to the activities of the company's life insurance underwriters.There is one rate schedule for average assignable costs when agents write standard policies.There is another rate schedule which the agents must complete when they write special policies,and these policies are costed out differently from those that are categorized as standard policies.
Required:
a.Why might the company have different costing systems with different overhead rates for the standard and specialized policies?
b.Which rate (standard or specialized)would cross-subsidize the other if the company used only one set of overhead rates for costing its policies?

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Definitions:

Efficient Frontier

A concept in modern portfolio theory demonstrating the set of optimal portfolios offering the highest expected return for a given level of risk.

Portfolio Standard Deviation

A measure of the dispersion of the returns of a portfolio, indicating its risk.

Individual Security

A specific financial instrument, such as a stock or bond, representing an investment in assets or rights to ownership.

Covariance

A statistical measure that indicates the extent to which two variables change together; if the covariance is positive, the variables move together, while a negative covariance means they move inversely.