Different types of expenses incurred in the operation of a business are referred to with various terms. One type of expense is called a fixed cost. Fixed costs remain the same over a period of time in the face of changing business volume. This is in contrast to variable costs, which increase with increased business volume and diminish when business is slower. Like other industries, the insurance industry incurs both variable and fixed costs.
Rent and Utilities
Some examples of fixed costs incurred by the insurance industry are rent on buildings and utilities. Rent is not sensitive to changes in business volume and utilities such as electricity and water use are typically considered fixed costs in the insurance business.
It is important to note, however, that there is such a thing as a mixed cost. Utilities are sometimes considered mixed costs. The portion of electricity and water use consumed in maintaining the building in the absence of any substantive business is a fixed cost. But, if there is an exceptionally large amount of business and the use of these utilities increases, then that additional cost is regarded as variable. However, because the act of selling insurance is not water or power intensive (as is some industrial production), this expense will most likely be considered a fixed cost.
Employee compensation is another example of an expense that may be considered a fixed cost. Support personnel who receive an hourly wage and work a consistent number of hours represent a fixed cost for the company.
Insurance agents’ compensation, however, would not likely be included in this category because agents work primarily on commission. Commission paid by the company to agents is in direct proportion to the amount of business that is done. That is a variable cost.
Licenses and Dues
Regulatory or licensure costs borne by companies or individuals are almost always pure fixed costs. Unlike the wages of full-time employees (which may occasionally see overtime or unpaid holidays) or managers (which are usually salaried but may be subject to bonuses), the cost of a licenses or permits remains the same whether it lies stagnant or is used for prolific business activity.
Other fixed costs may be various agreements or contracts. For example, to avoid the variable cost of intermittent computer problems and their resolution, a company may enter into a contract with a technical support provider, paying a monthly fee for all-inclusive service. Membership dues in various social or business organizations would also constitute fixed costs.
- businessman image by Jarek Miarka from Fotolia.com