What is the Formula for LC for GMA Approach?
What is the Formula for LC for GMA Approach? Still trying to understand it...
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What is the Formula for LC for GMA Approach? Still trying to understand it...
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I thought it was same as for the PAA approach. the FCF approach is GMA and simplified is PAA:
No, they are not the same.
LC(PAA) = FCF(GMA) - PAA excl LC (UEP-DAC)
LC(GMA) = Max(0, FCF(GMA))
Numerical Example:
UEP - DAC = 100
FCF(GMA) = 150
LC(PAA) = 150 - 100 = 50
LC(GMA) = 150.
That table is more of referring to how you can run-off your LC under PAA. If you check out the source section 5 is specifically referring to PAA
ok I guess it was the FCF approach label that wasn't clear, thanks!
Then this GMA section implies I guess that at initial recognition for an onerous contract, LRC excl LC = 0?
And then later we allocate changes (if any) in CF between LRC excl LC and LC, so is this when it becomes nonzero?
"the subsequent changes in fulfilment cash flows of the liability for remaining
coverage specified in paragraph 51 on a systematic basis between:
(i) the loss component of the liability for remaining coverage; and
(ii) the liability for remaining coverage, excluding the loss component"
Or maybe it also becomes nonzero as LC is systematically released?
It makes sense now that LC = FCF initially, but I'm not sure how that Changes over time.
Thanks!
No, that is not right. If you are onerous under GMA, at initial recognition you have 0 CSM and your LRC excl LC which is just your FCF (outflow - inflow) is positive. It is only 0 when you have a CSM because the CSM offsets the FCF. When onerous, nothing offsets the FCF and we have a positive LRC.
At subsequent measurement what you quoted is correct.
I am not really sure what you mean here "Or maybe it also becomes nonzero as LC is systematically released?"
The loss component is released as service is provided, similar to the CSM.
I like this paper to show how the LC is released: https://www.actuaries.org.uk/system/files/field/document/IFRS 17_LC1_Why do loss components need to be amortised_20191106.pdf
I think I am confused because of the text below the diagram on the right. We have that under GMA if onerous:
so, if LRC = FCF = LC, I thought the only way for this all to hold is for LRC excl LC = 0
Just finding it difficult to piece all of these definitions together. Thank you for the link though!
Humm yes it may seem that you are right when you lay it out in that way. It doesn't really seem intuitive but it must be the case. Personally, I only consider LRC excl LC for PAA and think in terms of FCF for GMA. It keeps it simpler.