Under statutory accounting principles, __________________costs are non-admitted assets and are charged directly to earnings, as their respective expense components are incurred.

Question

Options

• Acapital adequacy insurance
• Bdeferred policy acquisition
• Ccapital loss
• Dtrading cost acquisition

• A
  10% (4)
• B
  73% (29)
• C
  3% (1)
• D
  15% (6)

Explanation

Under Statutory Accounting Principles (SAP), deferred policy acquisition costs (DPAC) - such as agent commissions, underwriting expenses, and policy issuance costs - are treated as non-admitted assets, meaning they cannot be carried on the balance sheet and must be expensed immediately as incurred, unlike under GAAP where they are capitalized and amortized over the policy period.

Why the distractors are wrong:

• A (capital adequacy insurance) is not a recognized accounting cost category - it conflates regulatory capital concepts with expense treatment.
• C (capital loss) refers to losses on investment disposals, which are treated differently and are not the expense type described in the question.
• D (trading cost acquisition) is a fabricated term - no such cost category exists under SAP or GAAP.

Memory tip: Think of SAP as the "conservative" standard - regulators want insurers to show their worst-case financial position, so they force acquisition costs off the balance sheet immediately rather than letting companies defer them. If you remember SAP = non-admitted = expense now, you'll lock in the connection between deferred policy acquisition costs and direct charges to earnings.

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