PAA - LRC at initial recognition
Hello,
The formula for LRC= Premium - Insurance Acquisition +/- Amount from derecognition of asset and liabilities.
- I believe insurance acquisition refer to deferred policy acquisition cost (DPAC) right?
- If the acquisition cost are not deferred and expensed directly in the income statement, then "Insurance acquisition cost" term above=0. Is that correct? For the example in the wiki, assuming the acquisition cost had been recognized as expense (The "Insurance acquisition cost" term above=0), would the LRC be 900 or 750. I believe it should also be 750 but I am not sure how this would word. Please let me know @graham
- Does a derecognition of asset increase or decrease LRC?
- Similarly, does derecognition of liability increase or decrease LRC? I believe decrease.
Thanks,
Andrew
Comments
2) It would be 900 as the acquisition costs flow into P&L directly
3) Increase the LRC
4) Decrease the LRC
Could you explain why the derecognition of asset increased the LRC?
Thanks
Well when you reduce your DAC, your LRC = UEP - DAC, will increase since you have decreased your DAC
Could you give a more conceptual explanation of why the derecognition of asset increased the LRC and why the derecognition of liability decrease LRC? Thank you!
What do you mean by more conceptual? The formula is pretty clear -> When your DAC goes down (asset derecognized), the LRC increases and when your UEP (liability derecognized) goes down, the LRC decreases.
I agree with you, the formula is very clear. I'm having a hard time figuring out what is included in DAC and how DAC vary. I guess this will become clearer when I read the source text.
I wouldn't worry too much about what exactly is in the DAC for the exam -> Just knowing it is there is sufficient