Q16 - CoC RA Calculation & Opearting Expense

XiaoZhang25XiaoZhang25
edited September 2025 in Practice Exam - 2025-Fall

Hello guys,

I am wondering what is the reasoning behind calculating the RA in 0.5 year interaval in the answer key. Also, correct me if I am wrong, but I understand the logic behind having the same amount of capital required in year 0.5 and 1 is because the capital is only released towards the end of the year ?

My second question is for the opearting expense: In the question, it says the operating expenses are incurred towards the end of the month. However, in the table where the answer key is breaking down and cashflows month by month, this quantity is multiplied directly by 2% from the discounted premium (this quantity is assumed to incurr at the start), which I think might be a mistake as this way we discounted one less period.

Thanks in advance.

Comments

  • Staff-T1Staff-T1

    You can either choose to discount capital at the half-year or year-end interval. Although I think it would make sense to specify a capital release pattern (i.e. as premium is earned). That would be a correct assumption, although looking back I think it would be better to be clearer in the question with regards to how capital should be released in the RA because I think it is a little ambiguous as it stands.

    Yup you are right regarding the operational expenses. That is a mistake that will need to get fixed.

  • Staff-T1Staff-T1

    I have made the changes to the Practice Exam - You can redownload it and let me know if you have any other questions

  • CanAct06CanAct06

    1) for illiquidity premium, why are you taking average of year 3 & 4.

    2) How are you exactly coming up with this pattern? You use Cap Req for first 2 periods and then 60% of it in the last period? I don't understand your selection, in terms of timing and 60% application. I kind of understand that

    3) Why are you including the Acq Cost in the GMM LRC? It says fully paid at inception... so shouldn't that be gone? It is no longer a "Future CF"??

    4) PAA LRC - this makes a bit more sense here - but you had a completely different explanation for 29c in IFRS practice problems.

    what would PAA LRC be if 'it was in advance' like 29c? I don't understand how FCF would be used, because that is a GMM thing.

  • Staff-T1Staff-T1

    1) Because the duration of the reference portfolio is 3.5 years
    2) I've rechanged the pattern to be based on earned premium. You should redownload the latest files
    3) You are right. I should not be including that. I have made the adjustments
    4) Sorry, I am not really sure what you mean here

  • CanAct06CanAct06
    edited October 2025

    Can you explain 1 in more detail?
    Why are we adding back expected cred losses and inv expenses to find illiquidity premium.

    ++ I guess it means inv exp is the cost to manage to ref portfolio regardless

  • Staff-T1Staff-T1
    Expected credit losses are part of the credit spread so you don't want to double count them and investment expenses should be excluded cause that's specific to the reference portfolio and has nothing to do with the liabilities
  • kpark5kpark5

    For part (b), PPA LRC, can you explain why we use the first month premium expected to receive instead of UEP?

  • Staff-T1Staff-T1
    They average yield provided already subtracts the investment expenses so you exclude them by adding it back.

    Your definition of investment expense is correct
  • kybazzikybazzi

    Expected credit losses are part of the credit spread so you don't want to double count them and investment expenses should be excluded cause that's specific to the reference portfolio and has nothing to do with the liabilities

    This explanation has been confusing me, particularly the idea that we add back to account for double-counting.

    The calculation in the solution implies that:

    Reference Yield = (Risk-free) + (Credit spread) + (Illiquidity premium) − (Expected credit losses) − (Investment expenses)

    In this equation, the reference portfolio has expected credit losses and expenses that reduce the yield. Furthermore, it looks as though they are both separate components that have no relation to the credit spread. Therefore, the reason they are added back is not to account for double counting, but rather because they separately reduced the reference yield due to their nature of being losses/expenses.

    Please let me know where I'm going wrong here. Thanks!

  • exam6addoilexam6addoil

    i feel that Q16 is very difficult to answer, are we expecting this lvl of difficult question during exam?

  • Staff-T1Staff-T1
    The logic I was going for was that you are supposed to strip out everything that is not relevant to insurance contracts from the average yield.
    * Step 1: Add back the investment expenses to get the gross yield
    * Step 2: Remove everything that is not relevant to the insurance contract through the credit spread. However, the credit spread already has a provision for credit losses. Since the net investment yield already takes out the expected credit losses, if we don't add it back then we're double counting that deduction. But I think the way you view it also makes sense to me :)

    I spent a long time coming up with Q16 and tried to make it as difficult as possible to test all aspects of ifrs17. I don't think the exam will be as difficult but I can't say as I have not seen any of the questions before
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