Hi, I was wondering if anyone could provide a clear description of how DAC true up works, as this is a concept I find difficult to understand in parts, and I think seeing a fresh interpretation of it from someone would help my understanding. Many thanks for your help. Much appreciated
Since the phrase "DAC true up" isn't used in the Course Notes (from memory) and not being familiar with it, I googled the expression and found lots of references to it. However, when I restricted my search to pages from the UK, they all disappeared, so it seems to be a US term with quite a specific meaning under their FASs. As a general concept applied in the UK, we can think about what happens when we update the pattern of DAC write-off each year. We work out what surplus has emerged over the past year and compare this with our projections of how the remaining surplus will emerge over the lifetime of the policies we're considering. So if surplus emerging over the past year represents 10% of all surplus remaining (including this past year), then we might write down the DAC by 10%. This will be different from what we were expecting a year ago (8% say) for two reasons: 1. The surplus emerging over the past year will be different from expected 2. The remaining surplus will be different from that estimated a year ago, due to having a different starting point for the projections and using different assumptions about the future. The US seems to split these out and refer to the first one as "true up" and the second one as "dynamical unlocking", but for the UK's SA2 exam, it's enough to be aware that the pattern of DAC write-off isn't fixed at the start of a policy, but gets revised each year, based on updated experience and assumptions.
