Hi, Do we include acquisition cost in the profit calculation? So is it Profit = earned premium - incurred claims - acquisition cost - other expenses + investment income (Apr 2015 Q4 (i)) or Profit = earned premium - incurred claims - other expenses + investment income (2010 specimen paper Q1 (ii))? Similarly it is confusing whether to include increase in DAC in profit and loss account.
The formula to calculate underwriting profit and insurance profit is given on page 7 of Chapter 24 Accounting Methods. Paid acquisition costs should be included in the expenses paid item. The increase in DAC should be included (as a positive item) assuming that the earned premiums are calculated using the increase in the UPR GROSS of DAC.
The specific formula shoudl be as below. Profit = WP - UPR1 + UPR0 - Paid Loss - Unpaid Claims Reserves 1 + UCR 0 + DAC 1 - DAC 0 - Expenses + Investment income That is, Profit = WP - Increase in UPR - Paid Loss - Expenses - Increase in Unpaid Claims Reserves - Expenses + Increase in DAC + Investment income
Sherwin you only need to subtract expenses once. So the correct formula should be: Profit = WP - Increase in UPR - Paid Loss - Increase in Unpaid Claims Reserves - Expenses + Increase in DAC + Investment income Note "expenses" here are expenses paid and "profit" is insurance profit as it includes investment income.
