Sample-18
The following table is provided in the question and used to calculate GMM LRC and the Loss Component. From my understanding, PAA LRC = UEP - DAC = 48,000 - 225 = 47,775 which is very different than the provided -2,500. Can you let me know where I am going wrong with this approach?
Thanks!
Comments
You can't calculate the PAA directly here as you do not have the deferred acquisition costs. You would also need the undiscounted premiums receivable.
PAA = Prem Received - Earned Premium + Prem Receivable - DAC
Most of the time this simplifies to PAA = UEP - DAC as it is very rare for the premium receivable term to come up
I have a question regarding part C of this problem and the solution provided.
I understand where the 0.33 comes from for AAD and see CAS calculated the exponent as (avg time - (0.5-AAD)). For simplicity, would it be safe to assume that it will always be 0.33, 1.33, and 2.33 for years 0, 1, and 2 (if using "start of year" as the time)? Is there any reason to actually calculate those amounts when it ends up being AAD + start of current year?
Thanks for the explanation @Staff-T1! In the moment I was thinking that deferred and future acquisition costs were interchangeable.
For @sdeibert : It is always 1/3 for all years so there is no "+ start of current year
No problem @coco91 They are not interchangeable no, they are completely different things
Hi @Staff-T1 ,
Can you please confirm the formula for PAA LRC, you had:
PAA LRC = Prem Received - Earned Premium - Prem Receivable - DAC
should it be:
PAA LRC = Prem Received - Insurance Revenue (EP) + Prem Receivable - DAC
when you say it can be simplified into UEP - DAC, is it because if we assume all premiums are received, no receivable left?
Also, are all the premiums in this formula undiscounted?
Yes, it simplifies to UEP-DAC because we usually don't assume that there are any receivables for most questions. No discounting for the PAA LRC
Does DAC stand for Discounted Acquisition Cost?
Also, I just wanted to confirm that when discounting the cash flows to calculate LRC, I should always use the period as: time period - (0.5-1/3) ?
Deferred Acquisition Cost
And yes, always (0.5-1/3)
In Sample Q17,
Direct UEP (31) = Prem Received (28) - Insurance Revenue (29) + Prem Receivable (30)
But then in the LRC Calc,
PAA LRC ex LC (52) = Prem Received (28) - Insurance Revenue (29) - DAC (44)
Which is different from the formula shared above:
PAA = Prem Received - Earned Premium - Prem Receivable - DAC
It should be Prem Received + Prem Receivable - Earned Premium. I have made the changes to my above answers to avoid confusion. For some reason I read my initial responses as + Prem Receivable
For part (c), the BattleActs commentary states: “When calculating the LRC, you always need to apply an AAD adjustment before discounting. The amount to subtract is always 1/3, derived through calculus you don’t need to understand—just memorize it.” However, in the Excel illustrations (Appendix C Sh1 – LRC(onerous)) attached to the CIA Duration Education Note, the AAD adjustment is not applied when discounting the future cash flows for the LRC. Should the AAD adjustment have been applied in this case?
Yes it should have been applied but was not in the Duration Excel. I think it's an oversight on their part
If the AAD adjustment is applied to the discounting of cash flows in the LRC calculation (Duration Excel), what would that adjustment be? In Question 18(c), the time period is annual, and the adjustment applied is -(0.5 - 1/3). Since the time period in the duration calculation is quarterly, should we adjust the time by -(0.125-1/3) instead? Also, does this adjustment only apply to cash flows excluding maintenance costs, as maintenance costs are not subject to AAD?
This adjustment would only apply to claims as it is an average accident date adjustment. There is no accident date for maintenance costs so they are are not subject to that. The proof of this adjustment assumes losses and premiums are annual and continuous, so there is no simple way to translate this down to a adjustment if claims are paid out quarterly. If I had to do this, I would just total the quarterly claims into an annual amount -> State that this is done to apply the average accident date adjustment and then proceed as usual
For part d, which paper can I find the relevent information?
CIA.IFRS17-1
In the calculation of FCF, why is the premium receivable being minused?
So the problem with this question is as follows:
In conclusion, I was wrong and it should be UEP = prem received - earned premium.
Just wanted to wrap up this discussion for anyone coming across this.
Premium receivable is being subtracted as for the GMA calculation, you need to reflect all future cash flows including all receivables. However, because the FCF is** forward looking**, cash flows that have already occurred (premiums received) drops out