Premium Received and Premium Receivable

ShimiReenShimiReen
in CIA.IFRS17-LRC

Context:
The PAA formula at initial recognition is
LRC = UEP - Prems Receivable - DAC
= Premium received - DAC
and since at time 0 UEP = Premiums received since no premium has been earned yet and premiums receivable = 0, we have
LRC = UEP - DAC

Question:
1. Can you explain what is premiums received and why is it equal to UEP at time 0?
2. Also, what is premiums receivable and why is it equal to 0 at time 0?

Originally, I thought that premiums received is the premium amount we have collected and premiums receivable is the premium amount we have yet to collect. If that is the case, say we have a contract that pays in instalments. It has total premium of $1000 and pays 40% at inception and 60% mid policy term.
In such case wouldn't we have the following at time 0?
UEP = $1000
Premium Received = $400
Premium Receivable =$600

Comments

  • Staff-T1Staff-T1

    Your understanding is correct regarding the definition of premiums received, but for premiums receivable those can only be booked after the policy has incepted which is why it is zero here.
    In your example here, UEP will be 400

  • sidkiriyasidkiriya

    Assuming acquisition cashflow of $500 paid at initial recognition and not expensed out in P&L directly.

    1. Would that mean the PAA LRC be equal to 400-500 = -100, meaning the PAA LRC will be negative, is this correct ?

    2. Then as of mid year at subsequent measurement, the PAA LRC equal to -100+600-0+250+0-500-0 = 250 ?

    3. Then at year end, PAA LRC = 250+0-0+250+0-500-0 = 0 ?

  • sidkiriyasidkiriya

    Section 4.1 of the RI Issued and Help paper has this situation explained: "For example, on a proportional reinsurance contract issued with an effective date of January 1, it would be expected that the reinsurer receives the first bordereau16 in May or June (i.e., more than four or five months after contract inception). In such instances, an accrual (i.e., expected premium receipt) is used to estimate the insurance revenue reported in the statement of financial performance of the reinsurer. Furthermore, if the revenue recognized is larger than the amount of premium collected, the resulting LRC associated with that reinsurance contract issued could be negative, leading to a decrease in the insurance contract liability, and potentially creating an asset if the LIC and LRC combined for the portfolio is negative (e.g., in the example presented here, this might happen for the March 31 reporting period). The same situation would also exist (in reverse) for the reinsurance held perspective (i.e., the allocation of reinsurance premium may be larger than the actual cash paid to the reinsurer as of March 31)."

  • sidkiriyasidkiriya

    Question: "potentially creating an asset if the LIC and LRC combined for the portfolio is negative", so if in total LIC and LRC combined is negative then instead of showing a negative Insurance contract liability, we will show a positive Insurance contract asset ?

  • Staff-T1Staff-T1
    1. In theory, but how would your acquisition cost be greater than the premium itself? I get it for reinsurance, but i don't think this will happen on the direct side.
    2. I think It should be just your UEP at time 0.5 which should be 500.
    3. Yes, year end LRC is always 0
      I think this example is not really correct as having premiums receivable of 600 paid mid year means that you are providing some service before any premium has been received.

    To your last question, technically that is a negative liability, but yes I believe you are right that this is a positive insurance contract asset

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