PAA LRC: Insurance Acquisition Cash Flows
From the reading:
LRC =
(1) + Carrying Amount at Start of Reporting Period
(2) + Premiums Received in the Period
(3) + Amortization of Insurance Acquisition Cash Flows (unless P59a applies)
(4) + Adj. to Financing Component
(5) - Insurance Acquisition Cash Flows (unless P59a applies)
(6) - Amount Recognized as Insurance Revenue in Period
(7) - Investment Component Paid to LIC
Q1. What exactly does (2), (3), and (6) mean assuming Paragraph 59 doesn't apply?
Q2. Are there any Acquisition Cash Flows that are shared between (2) and ((3),(6)) ?
Q3. What changes to (3) & (6) when Paragraph 59 applies? Are they zeroed out?
Comments
Q1. Paragraph 59(a) allows you to expense all acquisition cash flows immediately, provided that your coverage period is less than a year. If this doesn't apply, you would amortize the cost of those acquisition costs across the life of the contract.
Q2. Not that I am aware of. 3 and 6 are just literally premiums received and earned premium
Q3. (3) will be 0 while (6) will not be affected
And concerning Q3, am I right to say that 5 too will be zero? Since it will be recognized as expense directly, we don't need to account for it in the LRC (since we won't amortize it)
Yeah, any acquisition cash flows go directly into P&L