Implications of PAA < GMA or PAA > GMA.

kybazzikybazzi
in CIA.IFRS17-PAA

I'm a little confused about signs for PAA-GMA or GMA-PAA.

1) Suppose PAA = 500, GMA = 700: then PAA - GMA = -200 will be less than any aggregate threshold. Is the aggregate threshold (Threshold #3 in the example) supposed to be compared against abs(PAA-GMA)?

2) Suppose PAA = 1000, GMA = 700, and we have onerous group. Which is correct:
a) LC = (GMA - PAA) = -300, LRC = 1000 - 300 = 700
b) LC floored at 0, with LRC = 1000 + 0 = 1000

Thank you in advance :)

Comments

  • Staff-T1Staff-T1

    1) Yup you should always take the absolute difference as what we would like is to verify the magnitude of the difference, either up or down

    2) By definition, that would not be an onerous group. But yes, it would be option b). There's no such thing as a negative LC. Negative CSM is possible for reinsurance held

  • kybazzikybazzi

    Thank you!
    1) Can consider updating the diagram in the Wiki to demonstrate this (e.g., seeing the negative difference -700 with no mention of absolutes could confuse some readers, although goes without saying that it's intuitive to go with absolute difference)

    2) I am still not at a point in my understanding (or maybe readings) to realize that by definition it can't be onerous if PAA < GMA, so I'm a bit mind-blown. Thanks again for your answer.

  • Staff-T1Staff-T1

    1) Okay I will add a note on that

    2) An additional corollary to that is that the PAA estimate of the LRC need not necessarily equal the GMA estimate of the LRC for a group of contracts. When a group of contracts is measured using the PAA, you can never be onerous if PAA < GMA. However, the same group of contracts measured using GMA could be onerous

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