Regarding the definition & purpose of the DPAE

user10_Exam6Cuser10_Exam6C
in CIA.PrLiabs

I am wondering if this is a reasonable explanation of what the DPAE does:

The DPAE is an asset that is meant to recognize the upfront acquisition expenses that are incurred when issuing a policy. It is a recognized as an asset as a result of the accounting principle of matching revenues and expenses. In other words, DPAE is listed as an asset on the B/S and amortized (or expensed) over the policy period as the expenses occur (and the premium is earned - meaning revenue is generated) thereby matching revenue and expenses more accurately.

How does this sound? Thanks

Comments

  • javidjavid

    Yes, that is a good explanation :)

  • user10_Exam6Cuser10_Exam6C

    great!

  • bkmlocksbkmlocks

    In Fall 2014 Q25(bi) from the battlequiz 1, the purpose includes ".. provided such costs are recoverable". I am wondering why this part is relevant ?

  • grahamgraham

    If the costs are not recoverable from equity in the Unearned Premium Reserve then you can't consider this an asset because the asset would have no "source" to fund it.

    Example 1:

    • Suppose you have $1,000 in deferred acquisition costs and and currently have $5,000 in your UPR. Well, $5,000 is more than $1,000 so you can recover that amount from the UPR. That means you can consider the $1,000 as a DPAE asset and over time draw down the UPR to pay for it.

    Example 2:

    • Suppose you have $1,000 in deferred acquisition costs and and currently have only $750 in your UPR. Well, $750 is less than $1,000 so you cannot recover that amount from the UPR. That means you can't count that $1,000 it as a DPAE asset. You don't have enough left in the UPR to cover it.
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