GIM2120 - Accounting framework: annual accounting: deferred acquisition costs (DAC)

A proportion of the related acquisition costs commensurate with the unearned premium provision should be deferred. Acquisition costs are those costs that relate to the acquisition of new business, such as brokers’ commission. Deferred acquisition costs (DAC) are calculated separately for each class of business by applying the ratio of unearned premiums to written premiums applicable to that class of business. Historically it was common for insurers to treat 40% of written premiums as unearned at the year-end on the basis that this approximated to a net figure for unearned premiums less deferred acquisition costs. This was the treatment adopted in the case of Sun Insurance v Clark 6TC59. This “netting off” is incompatible with the IAD ( GIM2030). Gross written premiums per the technical account are the total premiums receivable for the whole period of cover provided by the policies entered into during the accounting period.