7Acquisition Expenses

SECTION 7 Acquisition Expenses

Overview

A company normally incurs Acquisition Expenses and possibly receives Establishment Fees when it acquires new business.

Where new business is written with the expectation of producing profits, then, if the Establishment Fees are less than the actual Acquisition Expenses, there will be an expectation of receiving future income, part of which goes to meeting the unrecouped Acquisition Expenses.

The principles for the allocation of expenses to Acquisition Expenses are set out in section 13. Acquisition Expenses are defined in terms of the activities related to the acquiring of new business. The acquisition of new business can generally be considered to include activities of the company such as product marketing, sales, underwriting and administration, undertaken prior to and at the point of issuing the policy and establishing it in the policy records of the company.

The new business expected to derive from a particular expense may not necessarily be acquired in the same period in which the expense occurs. The new business must, however, be expected to arise as a result of that expenditure. To the extent the expenditure has only a tenuous link with the acquisition of new business - for example, general growth and development expenses – it is not considered to be an acquisition expense.

7.1 To the extent that Acquisition Expenses are not recovered by the Establishment Fees, they must be charged against expected future profits, provided that these profits are sufficient to recover them. Any Acquisition Expenses which cannot be recovered from Establishment Fees or expected future profit will emerge as a loss at issue.

7.2 Appropriate allowance must be made in this process for tax on both Establishment Fees and Acquisition Expenses.

7.3 Where expected future profits for a Related Product Group are insufficient to recover unrecouped Acquisition Expenses, the loss must be recognised in accordance with the processes of section 11.

7.4 Where a projection approach is used to calculate the Policy Liability, the expected income which is used to recover Acquisition Expenses is incorporated as a reduction in the Best Estimate Liability calculation. Accordingly, Acquisition Expense Recovery Components are an implicit component of the valuation.

7.5 Where an accumulation approach is used to calculate the Policy Liability the value of the unrecouped portion of Acquisition Expenses which is to be recovered from future income must be explicitly allowed for as a reduction in the liability by using Acquisition Expense Recovery Component(s).