Insurance Acquisition Costs: Capitalizing Versus Expensing
Posted: 16 May 2016
Date Written: May 16, 2016
This paper examines whether the capitalization-amortization or the direct expensing method for insurance acquisition costs and commissions better reflects the economic substance. We find that both the currently capitalized-amortized acquisition costs and the as-if asset balance of expensed commissions are positively associated with equity market values, and are closely related to the level and volatility of subsequent insurance premiums. Results also show that when explaining the equity market value, the insurance commission is significantly negative if capitalized and amortized, but is insignificant if directly expensed. We are the first to examine how the insurance acquisition costs and commissions are related to subsequent economic benefits, and our results suggest that the partial deferral of insurance commissions does not faithfully reflect economic substance. The findings are also consistent with the IASB’s exposure draft of IFRS 4, under which the acquisition costs and commissions shall not be immediately expensed.
Keywords: insurance acquisition cost, commission, IFRS 4, value relevance
JEL Classification: M40, M41, G22
Suggested Citation: Suggested Citation