Hi, As you are probably aware, one important concept used in creating insurance companies' accounts is the accrual concept whereby income and expenditure should accrue over the period to which they relate. Hence, earned premium is calculated as this tells us how much premium has accrued during the year and incurred claim also is consistent with the accruals principle as we look at both the amount of claims paid and the increase in the total reserve for outstanding claims. When the insurer writes business, it pays commission and other initial expenses upfront. As at the valuation date, these costs would include costs already paid for unexpired policies. To be consistent with the treatment of premiums and claims above, the expense item will also need to be based on an incurred basis rather than just showing expenses paid. As such, DAC is largely made up of commission which has been paid in respect of premiums that will be earned after the accounting date. In the revenue account, UPR can be presented on a gross of DAC basis, and a DAC as an asset in the balance sheet is set up. This would reduce over the exposure period of the policy at the same time you would expense the acquisition costs in the PnL. Please note on an ongoing basis, one can also reduce the UPR for acquisition expenses and show a UPR net of DAC in the revenue account without creating a DAC asset in the balance sheet. Hope this helps Toby.
