question about DAC

[toms]

what is the aim of creating DAC ?

As I see the situation is that companies must use solvency reserves for calculation of required assets
moreover solvency reserves are used to calculate required capital
and solvency reserves use no DAC
then when you calculate Taxable earnings you also use solvency reserves and adjust for timing and permanent differences (no DAC)

The only place where I find DAC is the calculation of earning reserves and stockholder earnings then you can have lower reserves and higher earnings- but this is only on paper because in fact
you need to rise your capital because of solvency reserves and your distributable earnings are not affected by DAC
i dont see how creating a DAC can help you with new business strain ?

Moreover the DAC Tax is something that is totaly mysterious to me because it is said "The DAC TAX regulation reduces the amount of expenses that can be deducted"
But what "expenses" ? And where deducted from ?
If there would be no DAC TAX regulation then would I be able to deduct expenses when calculating Solvency reserves ?
I see that DAC TAX only makes the tax higher but reserves remain unchanged.
In this situation a DAC looks like not a tool to help a company with high reserves but as a tool to get more money from company ! So should it be realy a DAC ?
very confusing to me...

[thing]

Originally Posted by toms

what is the aim of creating DAC ?
...
In this situation a DAC looks like not a tool to help a company with high reserves but as a tool to get more money from company ! So should it be realy a DAC ?
very confusing to me...

You appear to understand it perfectly!

[An Affair to Remember]

I think you understand it correctly.

In GAAP, it is called the Matching Principle.

Statutory reserving doens't follow that very well.

DAC TAX has nothing to do with DAC.

[Wasabi312]

Originally Posted by toms

what is the aim of creating DAC ?


i dont see how creating a DAC can help you with new business strain ?

As said above, DAC is just a way of matching expenses to revenues. Acquistion costs and high commission expenses are paid in the first year to get the business on the books but you spend that amount in hopes that you're going to keep the business past the first year. So GAAP lets you spread the expenses over the expected life of the asset (you create a DAC asset and amortize it over the lifetime).

Often those expenses are a large percentage of the first year premium (or maybe >100%) so if you were to take that hit on your reported earnings the first year, you probably would think twice about taking the business (i.e., new business strain).

I think of DAC is more accounting than cash-flow; that's why it shows up on GAAP, not stat (which is more concerned with solvency) reporting.

[E]

This sort of discussion arises when actuaries have run-ins with accountants. It becomes an argument between the logical and the "that's just how it's done."

[toms]

I understand spreadign costs and amortizing
but the problem as I understand is that when you issue new busines you need :
a) cover the solvency reserves with assets
b) increase RBC
c) pay aquisition costs

all this requires cash and thats the problem
so how a DAC can help me with this ?
I calculate solvency reserves which are conservative and allow no or little acquisition costs to be included and need to get assets to cover this
so I can create a DAC an asset
and logic tells me a DAC as an asset can be used to cover solvency reserves - so instead of decreasing reserves you increase the assets
but I have not came across this in LIPF book !
There is no a word saying that you include DAC as an asset to cover solvency reserves but I know that in my country it works this way

the question that arises is how do you calculate investment income on DAC asset ? :P but maybe its too complicated on this level

so now its quite clear and we can move to DAC TAX
here taxable earnings are based on solvency reserves adjusted for timing and permanent reserves but as far as I know this not inlcude the decreasing reserves due to acquisition costs (no such information in book)
so Tax authorities say that if you normaly report increased earnings due to using DAC in GAAP then we will "help" you increase earnings by adding DAC TAX

this is how I understand all this

[hellen2004]

I calculate solvency reserves which are conservative and allow no or little acquisition costs to be included and need to get assets to cover this
so I can create a DAC an asset

I think the solvency reserves have included the acquisition costs which make them very conservative since the earning would be very low or even negative(new business strain). But when calculating earnings, the acquisition costs are not seen as to be expensed in the first year, instead you amortize the acquisition costs for a period. So in solvency reserve, you expense the acquisition costs in the first year, and it is equivalent to say that you have a DAC asset since the acquisition costs are actually spreaded in the future period.

[An Affair to Remember]

Originally Posted by toms

logic tells me a DAC as an asset can be used to cover solvency reserves - so instead of decreasing reserves you increase the assets but I have not came across this in LIPF book !
There is no a word saying that you include DAC as an asset to cover solvency reserves but I know that in my country it works this way

There is no DAC in Statutory world, so DAC will not cover those statutory solvency reserve and RBC.

Originally Posted by toms

the question that arises is how do you calculate investment income on DAC asset ? :P but maybe its too complicated on this level

That's the interest rate you discount your gross premuim/estimated gross profit streams. Imputed interest on DAC is your benefit of deferring the acquisition to later years. (i.e. it will reduce the amortization in earlier years.)

Originally Posted by toms

so now its quite clear and we can move to DAC TAX
here taxable earnings are based on solvency reserves adjusted for timing and permanent reserves but as far as I know this not inlcude the decreasing reserves due to acquisition costs (no such information in book)
so Tax authorities say that if you normaly report increased earnings due to using DAC in GAAP then we will "help" you increase earnings by adding DAC TAX
this is how I understand all this

I don't think you understand DAC Tax.
Think it as a mechanism to accelerate the taxable income.

[toms]

Originally Posted by hellen2004

I think the solvency reserves have included the acquisition costs which make them very conservative since the earning would be very low or even negative(new business strain).

I agree that conservative reserves make earnings lower because reserve increases are treated like a cost for company
but when we speak about solvency reserves I wouldnt agree that they include all aquisition expenses beacause in case of NET LEVEL calculations no acquisition can be included and for example in case of zillmer expenses are limited to 3,5% of benefits

[toms]

Originally Posted by An Affair to Remember

There is no DAC in Statutory world, so DAC will not cover those statutory solvency reserve and RBC.

you mean in statutory balance sheet ? or reporting ?
so you create a balance shee following GAAP rules and have DAC and then you create statutory balance sheet and you have no DAC?

Originally Posted by An Affair to Remember

I don't think you understand DAC Tax.
Think it as a mechanism to accelerate the taxable income.

thats why I wrote "help" in quotation marks
I think in case the company has negative Taxable earnings DAC TAX is the way to lower taxes beacuse you can spread the loss over the 10 years