Hi, I just want to check - In the P&L we always include the increase in Dac (add on as a negative expense which is fine) Should we also always include the actual acquisition expenses in the expense section? Most questions I've come across it has been included but I've come across one where it hasn't been included in the expense section. Should it only be included in the expense section of the P&L if the question clearly states?
Hi there Yes that's correct in the P&L (Technical Account) you should add on the Increase in DAC (as a negative expense). At the same time you should include the actual paid acquisition expenses in the year concerned within the Expenses Paid item that is being deducted. Effectively the two items turn the acquisition costs to being on an "incurred/earned" basis equivalent to the premiums and claims.
Does the existence of an "increase in DAC" figure mean that the business is growing? Similarly if earned premiums < written premiums does this mean the business is growing? Thanks
Similarly if earned premiums < written premiums does this mean the business is growing? I don't think this is necessary. Consider a company that wrote 100 million each year for two years but is writing five year contracts. The earned premium in second year is around 20 million which is less than the written one. Probably it also affects how premium is earned, whether it is uniformly or not.
ok, so lets assume - annual policies - policies incept evenly over calendar year - risk distributed evenly over policy year Would my assertion hold now?
Think your assertion would hold for this: Similarly if earned premiums < written premiums does this mean the business is growing? It seems as though it more likely to hold for Gross. However, if your thinking net then there may be all the RI related movements affecting this. Does the existence of an "increase in DAC" figure mean that the business is growing? - I think the answer is Yes, all other things equal. Otherwise it could just be because acquisition costs are increasing
As LastHurdles has said one reason for the DAC increasing is because the book is growing. However there are many other possible explanations which include: non annual policies unusual earnings patterns change in acquisition costs change in distribution channels (and hence costs) change in mix of business with correspondingly different acquisition costs etc
