Why is RA subtracted?

exampasserexampasser
in CIA.IFRS17-LRC

In the formula, it says:

LRC=FCF+CSM = (Future cash inflows-Future cash outflows)+effect of discounting-RA +CSM

I am having a hard time understanding why is RA subtracted?

I remember in a prior reading that is no longer on the syllabus, it said:

APV=PV(Future Cashflows)+RA for non-financial risk+CSM

Why is it being subtracted now?

Comments

  • adipelinoadipelino
    edited October 2022

    I think because they definite the FCF as (inflows - outflows) in this formula, instead of the reverse. RA in an insurance contract issued is a 'bad' thing (adds to the liability) so it should go in the same direction as the outflows. This is how I remember it.

    But not sure why the CSM is added in both cases

  • Staff-T1Staff-T1
    edited October 2022

    Adipelino is right. The CAS have been inconsistent in how they define the LRC in different papers.

  • exampasserexampasser
    edited October 2022

    Looks like the formula they give in the excel WB doesn't match this formula either in terms of FCF definition of inflows - outflows:

    LRC=FCF+CSM = (Future cash inflows-Future cash outflows)+effect of discounting-RA +CSM

    Vs in excel they have outflows - inflows

  • Staff-T1Staff-T1

    As I mentioned a few times the CAS is inconsistent in their definition everywhere. It is inflows - outflows on Page 22 of the LRC paper which is what the wiki is referring to

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