Deferred Acquisition Costs (DAC) may sound like financial jargon reserved for accountants, but in 2025, this concept is crucial for anyone invested in Australia’s insurance, superannuation, or wealth management sectors. As regulatory standards evolve and insurers adjust to volatile market conditions, understanding DAC is more important than ever for investors, CFOs, and even everyday policyholders.
What Are Deferred Acquisition Costs?
In simple terms, DAC refers to the expenses an insurance company incurs to acquire new business—such as commissions, underwriting, and policy issuance costs—that are capitalised on the balance sheet and amortised over time. Instead of recording all acquisition expenses upfront, insurers spread these costs over the life of the insurance contract, aligning expense recognition with revenue generation.
- Example: If an insurer spends $1 million in commissions to acquire new policies in January, it doesn’t deduct the full amount from January’s profits. Instead, it records the $1 million as a DAC asset and gradually expenses it over several years as policyholders pay premiums.
This approach smooths profit reporting and provides a clearer picture of ongoing profitability. However, it also introduces complexity, especially when market conditions change or regulatory standards are updated.
Why DAC Matters in 2025: Policy, Profitability, and Risk
Several factors have put DAC under the spotlight in 2025:
- IFRS 17 Implementation: The Australian insurance sector fully adopted IFRS 17 accounting standards in 2023-2024, dramatically changing how DAC is recognised. Under IFRS 17, DAC is part of the broader Contractual Service Margin (CSM), leading many insurers to re-evaluate their balance sheets and profitability metrics.
- APRA Scrutiny: The Australian Prudential Regulation Authority (APRA) has increased its oversight of insurers’ capital adequacy and reporting practices, focusing on how DAC is measured and amortised. Insurers now face stricter requirements for justifying DAC balances, especially in life insurance and income protection segments.
- Volatile Markets: Persistently high claims ratios in 2024-2025, particularly in health and life insurance, have forced some insurers to reassess the recoverability of DAC assets. If future profits are uncertain, DAC may need to be written down, directly impacting reported earnings.
For investors and super funds, these changes affect everything from dividend outlooks to capital returns. A large DAC write-down can signal deteriorating business prospects, while well-managed DAC can support sustainable growth and returns.
DAC in Action: Real-World Examples and Investor Implications
Let’s bring DAC to life with some recent Australian examples:
- Life Insurance: In 2024, several ASX-listed life insurers reported DAC write-downs after reviewing persistently high lapse rates and claims following the pandemic. For instance, insurers like TAL and AIA adjusted their DAC balances downward, impacting net profits and dividend guidance for 2025.
- Super Funds: Large superannuation funds offering group insurance must also account for acquisition costs. With APRA’s new heatmaps and performance tests in 2025, funds are under pressure to ensure DAC is properly matched to premium inflows and member outcomes.
- General Insurance: Insurers in the home and motor space have seen DAC stability, thanks to strong premium growth. However, with climate risk and natural disaster claims rising, there’s a renewed focus on stress-testing DAC recoverability under adverse scenarios.
For investors, it’s crucial to look beyond headline profits. Scrutinise how insurers and super funds account for DAC, especially in periods of market stress. A sudden spike in DAC amortisation or write-downs may indicate underlying problems in new business quality or profitability.
2025 Regulatory Updates and Best Practices
In 2025, several regulatory updates shape how DAC is managed and disclosed:
- Mandatory Enhanced Disclosure: The Australian Accounting Standards Board (AASB) now requires more granular DAC disclosures in financial statements, including key assumptions, amortisation rates, and sensitivity analyses.
- APRA Reporting: Insurers must now submit quarterly DAC reconciliation reports and stress-test recoverability under multiple economic scenarios, as per APRA Prudential Standard LPS 112 updates.
- Super Fund Transparency: Super funds must disclose acquisition cost recovery in annual member statements, helping members understand how insurance costs are allocated over time.
Best practices for 2025 include:
- Regularly reassessing DAC recoverability and adjusting for changes in lapse rates, claims, and discount rates.
- Aligning DAC assumptions with broader business strategy, especially when launching new products or entering new markets.
- Communicating DAC impacts clearly in investor presentations and annual reports, supporting informed decision-making.
Conclusion
Deferred Acquisition Costs may be hidden deep in financial statements, but their impact ripples through profits, dividends, and member outcomes. As regulatory scrutiny sharpens and market conditions evolve in 2025, understanding DAC is a must for investors, policyholders, and finance professionals alike. Stay alert to how your insurer or super fund manages DAC—it could make all the difference to your returns and financial security.
