Dallas and Atkinson: (7.4.10)

[Roto]

Why the hell do my boys D&A have expense allowances netted out of commissions?

This is bothering me.

I would think they'd be most appropriately added back to Prem(t) or netted out of Exp(t).

Does anyone else agree that this is bogus, or am I missing something?

:horse:

[Roto]

I think I may kind of see the logic now... its b/c expense allowance is designed to cover reinsurer's share of ALL expenses (including commissions). In fact, on a non single-pay product, commissions may be the largest expense...

Although I'm still not convinced that it wouldn't be more appropriately netted out of prem(t), the fact that it is netted out of Comm(t) seems a little more palatable now.

[inexactuary]

First year commissions are usually the biggest acquisition expense even for level pay products (often exceeding the first year premium when you include commissions to managers, new agent financing, etc.)

[Actuary_JB]

Another perspective is to look at the expense allowance as a commission paid to the direct company for the business.

That is, you can view the direct company as the "agent" and the reinsurer as the "company." The agent (direct company) brings business to the company (reinsurer) in exchange for a commission (the expense allowance).

I think this is the main reason the expense allowance offsets the commission: it can be considered a commission you are receiving from the reinsurer.

I hope that helps.

JB