Acquisition costs are expressed as a proportion of new business premiums. How is this charged to the AS though (particularly if the company calculates aggregate AS)?
Hi. Acquisition costs aren't necessarily expressed as a proportion of new business premiums: they might be per policy instead or a mix of the two approaches. But let's say that acquisition costs are 5% of the first premium paid for any policy and let's say that this is the amount that the company wishes to charge to asset share (either being the actual expense incurred or as an explicit charge). When the asset share is calculated, rather than starting the calculation with 100% of the first premium the company will just use 95% of that first premium. This is true whether the company is calculating it as an individual asset share for that policy (so the calculation will start with 95% of the first premium) or as an aggregate asset share. For the latter, when the premiums received in relation to new policies are added into the aggregate asset share amount, 5% of each is deducted (or, equivalently, 95% is added rather than 100%). Does that make sense?
