Which statement concerning insurer financial relationships is true?

Which statement concerning insurer financial relationships is true?

• A. Delaying recognition of policy acquisition costs while accelerating related revenue increases surplus.
• B. Immediately recognizing policy acquisition costs while deferring recognition of the associated revenue causes surplus to decrease.
• C. Recognizing policy acquisition costs has no effect on surplus.
• D. Deferring acquisition costs indefinitely has no effect on surplus.

Answer: (B)

Policy acquisition costs are meant to be matched with the premiums they help generate. In insurer accounting, those costs are typically deferred as an asset and then amortized as the related premiums are earned. If you recognize policy acquisition costs immediately as expenses, you reduce current surplus. If you also defer recognizing the associated premium revenue, you’re not counting that revenue now either, which further reduces current surplus. So the combination of expensing PACs right away while delaying the related revenue correctly lowers surplus in the period, making that statement the true one. Delaying PACs while accelerating revenue would artificially boost current surplus and isn’t consistent with proper matching; recognizing PACs does affect surplus; and deferring PAC indefinitely would distort results by never recognizing the cost.

Policy acquisition costs are meant to be matched with the premiums they help generate. In insurer accounting, those costs are typically deferred as an asset and then amortized as the related premiums are earned. If you recognize policy acquisition costs immediately as expenses, you reduce current surplus. If you also defer recognizing the associated premium revenue, you’re not counting that revenue now either, which further reduces current surplus. So the combination of expensing PACs right away while delaying the related revenue correctly lowers surplus in the period, making that statement the true one. Delaying PACs while accelerating revenue would artificially boost current surplus and isn’t consistent with proper matching; recognizing PACs does affect surplus; and deferring PAC indefinitely would distort results by never recognizing the cost.