B.1 Expenses and Capitalization Flashcards
FAS 60 expense categories
DAC requires sorting expenses into categories:
- Deferrable acquisition = DAC
ex: UW expenses, commissions, agent incentives - Nondef. acquisition = None
ex: advertising, comms on ultimate renewals - Direct Maintenance = benefit reserve
- Investment expense = DAC and benefit reserve
- future utility expense = unique asset
- overhead = none
FAS 97 & FAS 91 expense categorization
FAS 97 is very similar to FAS 60
-level recurring expenses = direct maintenance
FAS 91 = more restrictive of deferrable assets. only costs directly related to acquisitions
GAAP: Line of Business and category Analysis
Line of business allocation
- expenses first need to be allocated to the product lines and then to the appropriate acct model in each LOB
Category Determination - costs then need to be assigned to one of the 6 appropriate expense categories
GAAP expense allocation considerations & issues
-Percentage of premium expense allocation - premium taxes are usually removed and assigned at the policy level
allocation of salaries
-allocate based on functions, then assign functions as def vs nondef.
direct maintenance vs overhead
- judgement
- bottom-up and top-down approach
investment expenses
-expressed as a reduction of investment income
selection of units of measurement - may want to convert to a per policy basis
issues
- deferrable expenses before issue date
- Backdating
- large non-recurring expenses need to be differentiated with recurring and inflation
- new ventures and LOBs
- expense improvements for startups
GAAP: determination of deferrability of acquisition costs
short duration contracts
- entire comm is capitalized
long duration
- deferrable commissions = excess initial comms over ultimate comms level
- most UW expenses = deferrable
- policy issue expenses = deferrable
- home office marketing and selling are deferrable only if they are closely associated with production
why a DAC true-up process is necessary for FAS 60 business
If using estimated reserve factors, the actuary must demonstrate that the implied capitalization derived from the per unit assumption used in the DAC reserve formula is not significantly different from the actual deferrable acquisition costs incurred
Steps for truing up DAC
- separate DAC into 2 categories:
- DAC from commissions
- DAC from other deferrable expenses - solve for the max PV of non-comm DAE
= PVGP - PV(benefit +maint expenses) - PVcomm - multiple (2) by the number of units inforce
- repeat 1-3 for each product and sum together. (max non-comm DAE)
- obtain total actual def acquisition expenses from company accounting
- calc the ratio of (5) / (4)
- calc the total unadj mean DAC
- Final DAC = (6) * (7)
GAAP general guidance
SFAC 5 & 6
SFAC 5 - guidance for expense and loss recognition
1. consumption of benefit - recognize expense when an entity’s economic benefits are consumed in revenue-earning activities
- Loss or lack of benefit - recognize expense if it becomes evident that previously recognized future economic benefits of assets have been reduced/eliminated
SFAC 6 - Financial statements
- expenses are outflows, using up of assets, or incurrence of liability
- expenses = actual/expected cfs that occur or will eventually occur resultant from an entity’s central operations
A cost does not become an expense until it is recognized i the financial statements
FAS 60
- covers all contracts except those that have been specifically reclassed later
- nonpar life, some par life, and individual health policies
FAS 97
- covers most life/annuties with account values
- UL, VUL, fixed def annuities, variable annuities accumulating
FAS 91
Investment contracts
-amortization of DAC for GICs, funding agreements, deferred annuities with low/no SCs
FAS 120
Par traditional life of mutual life insurers
if dividends are based on the contrib principle
