Acquisition costs
Variable costs directly linked to selling a policy: intermediary commissions, solicitation expenses and variable underwriting costs.
The IASB publishes IFRS 17 in May 2017 and defines in it insurance acquisition cash flows, which the standard folds into contract cash flows. Acquisition costs cover the variable costs incurred to obtain or renew a policy: commissions paid to brokers and agents, variable sales compensation, direct marketing, underwriting costs attributable to the contract. They are the dominant component of the expense ratio and vary sharply by channel. Brokerage and affinity cost markedly more than direct selling without being the least profitable for that, since portfolio persistency also differs. The accounting treatment weighs heavily: costs directly attributable to a contract are deferred and amortized over its term, so as not to load a single year with the cost of production whose premiums will spread over several. The first cut to make in reading a business model separates acquisition costs, variable and production-linked, from administrative expenses, fixed and structural. The former shrink when you stop writing, the latter stay.
Textbook case: 20% broker commission on 1,000,000 EUR GWP = 200,000 EUR acquisition costs, contributing 20 points to a total 28% expense ratio.
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