Onerous vs Non onerous contracts for GMA and PAA method clarification
This is my understanding (please correct me if I am wrong here!)
GMA
Onerous: LRC = FCF = LRC excl LC + LC
Non Onerous: LRC = FCF + CSM = LRC excl LC
PAA
Onerous: LRC excl LC + LC (where LC = GMA LRC - PAA LRC)
Non Onerous LRC excl LC = UEP - prems receivable - DAC
LRC excl LC for both onerous and non onerous contracts are calculated the same way UEP - prems receivable - DAC
Question
So for onerous contracts using PAA, you'll still need to calculate the GMA LRC to get the LC? What is the purpose of the shortcut PAA to calculate LRC, if GMA method if still needed to calculate PAA LRC for onerous contracts?
Why is it that for onerous contracts, GMA LRC = PAA LRC? Why does this not stand for non onerous contracts?
Do you have a numerical example to help wrap my head around this.... 
Comments
For your GMA non-onerous, that is not right. LRC = FCF + CSM
For PAA, non onerous LRC excl LC = prem receivable - earned premium - DAC or just UEP - DAC.
The UEP - prems receivable portion of your LRC excl LC is not right
"So for onerous contracts using PAA, you'll still need to calculate the GMA LRC to get the LC? What is the purpose of the shortcut PAA to calculate LRC, if GMA method if still needed to calculate PAA LRC for onerous contracts?" Because most of the time contracts are not onerous and you can bypass the GMA calculations with this simplification.
"Why is it that for onerous contracts, GMA LRC = PAA LRC? Why does this not stand for non onerous contracts?" Because PAA is meant to be a simplification of the GMA. You can simplify if your contract is non-onerous, but not if it is in fact onerous.
I think the CAS provides a sample LRC calculation file with the LRC paper which should help
Did you mean "You can simplify if your contract is NON onerous, but not if it is in fact onerous." ?
yeap that's a typo - Fixed it
One more follow up:
Under the into, I see this
And I see that LRC excl LC = UEP - prems receivable - DAC. You mentioned it is wrong above - Why is this formula wrong?
It's a typo which Graham will fix. It should be UEP - DAC
Ok, I deleted that information by enclosing it in a red box. See here:
I still don't understand why the formula PAA LRC excl LC = UEP - prems receivable - DAC is incorrect.
According to the paper, at subsequent measurement the premium portion of the LRC calculation reflects:
"premiums received up until the end of the reporting period less insurance revenue
associated with premium for the insurance contract services provided up until the end
of the reporting period, which is mathematically equivalent to the unexpired portion of
the total premium receipts, net of premiums receivable"
If I understand this paragraph correctly, that means that:
Premiums received - EP = UEP - premiums receivable
So shouldn't premiums receivable be part of the LRC formula if we are calculating it based on UEP?
The definition of unearned premium is premiums received less earned premium.
Your PAA formula would be = Premiums received - earned premium - premiums received - DAC = - earned premium - DAC which doesnt make sense
Hello, this post got me really confused.
If I understand correctly, the formula PAA LRC Excl LC= UEP - prems receivable - DAC
is incorrect. According to the wiki here, https://battleactsmain.ca/wiki6c/CIA.IFRS17, the formula is correct. Could you please let me know if I am misinterpreting concepts here?
For the Appendix example, Group B and C were eligible for PAA approximation.
What if we were told that they were onerous. Should we also add the difference between PAA and GMM?
1) The wiki is incorrect. I think it should have been changed the last sitting. Well get it fixed.
2) Yes, the difference would be the LC
Loss Component = LRC using GMA - LRC using PAA
when the contracts are onerous and PAA eligible, is the LC always positive? If not (ie when LC is negative), what do I do with it?
Yes, when contracts are onerous, LC is always positive. You can't have a negative LC
Hello @graham,
To reiterate, the PAA LRC formula for non-onerous = UEP - DAC. Is that correct?
If this is the case, could you please update the formula in CIA.IFRS17? Might prevent other students getting confused.
Thank,
Andrew
Yes that is correct