Memory trick for DAC, also PDR calculation

amberxmc

Since SAP has one less "A" than GAAP, that helps me to remember D"A"C does not exist in SAP, so doesn't include that in calculation of SAP PDR.

graham

Never would have thought of that! I like it. (I gave you a shout-out the BattleCard in quiz 2 of that chapter.)

Comadiroma

For the PDR I find it easy to remember the calculations, but my big problem was forgetting which ones went with which (GAAP or SAP). My memory trick ended up being "SAP is simple", it doesn't subtract DAC for the Prem Deficiency like GAAP does and the DAC Asset and PDR Liability calculations are much simpler than GAAP's

graham

Yup, SAP is simple and tells it like it is!

marodriguez

i) I think a concise formula could be PDR=-min(Revenue-Costs,0)
where cost includes DAC under GAAP and excludes DAC under SAP. Correct?

ii)I think I understand the formula and the mechanics of how to calculate PDR under both GAAP and SAP. But in principle SAP should be more conservative. So how is excluding DAC from the PDR a more conservative form of accounting? It sounds like GAAP has a more conservative PDR. What am I misunderstanding?
Thanks,
-Marco

graham

For (i):

• Your formula is conceptually correct for capturing the essence of PDR. However, it abstracts away some details (like other components of costs) which might be necessary for more precise calculations in specific cases.

For (ii): The conservatism of SAP isn't directly in the PDR calculation itself, but in its approach to recognizing acquisition costs. Let me explain:

• SAP's exclusion of DAC from the PDR calculation doesn't make it less conservative. It's the upfront expensing of acquisition costs under SAP that reflects a more conservative view, as it avoids deferring costs that might not be recoverable in the future.
• GAAP's method, while it could lead to earlier recognition of a PDR, starts from a position of deferred expenses, thus less conservatively representing the immediate financial position of an insurer.