E
echo20
Member
Chapter 21, Section 3.2: Core reading says “Acquisition costs may already have been naturally deferred by an appropriate choice of valuation basis, for example the use of a gross premium valuation. Otherwise, within limits, it is required that a DAC asset be set up in the balance sheet.”
I understand this to mean that by using a gross premium valuation, the day 1 reserve is reduced by the present value of the initial expense loadings within the gross premiums. This offsets the initial expenses, so profits aren’t understated and a DAC isn’t necessary. Is this understanding correct and if so, is it the case that a DAC is never appropriate in conjunction with gross premium valuations? I ask because I’ve seen FSA Returns which state that a gross premium valuation has been used (and there’s no mention of net premium valuations and no with-profits business), but where a DAC is present.
I understand this to mean that by using a gross premium valuation, the day 1 reserve is reduced by the present value of the initial expense loadings within the gross premiums. This offsets the initial expenses, so profits aren’t understated and a DAC isn’t necessary. Is this understanding correct and if so, is it the case that a DAC is never appropriate in conjunction with gross premium valuations? I ask because I’ve seen FSA Returns which state that a gross premium valuation has been used (and there’s no mention of net premium valuations and no with-profits business), but where a DAC is present.