PAA LRC

daviddavid
in CIA.IFRS17-LRC

I'm having trouble with the PAA LRC formula at initial recognition. The second line in the formula is "minus any insurance acquisition cash flows at that date, unless the entity chooses to recognize the payments as expense". Can you explain what is meant by the "unless chooses to recognize as expense" part. If the acquisition costs are deferred and amortized over the coverage period, are we subtract the entire acquisition expense or only a part of it?

For example, in sample 22 part a, if the question asked for PAA LRC at initial recognition, is my calculation correct:

premium received at initial recognition = 2500
acquisition cash flow = 250

PAA LRC = 2500-250 = 2250

Comments

  • Staff-T1Staff-T1
    Recognizing as an expense means you don't defer the acquisition costs and fully recognize all of the expense at day one.

    You subtract the entire portion that is deferred .

    The premium received at time 0 is half of 2500 because the question mentions that premiums are received based on the passage of time. Likewise for the acquisition cost which means your PAA LRC = 0.5*(2500-250)
  • daviddavid

    I guess I still don't fully understand the "recognize as expense" part. Does that mean the full amount of acquisition costs are only considered in the insurance service expenses calculation, or are they only considered in the calculation of LRC (i.e. subtracted from premium received)? or both?

    As for the calculation, I would've thought your calculation is for end of year 1 result. Because at end of year 1, half of 2500 is earned, and there is still half of the 250 acquisition costs yet to be expensed. So PAA LRC = 0.5*(2500-250). Could you explain why the same calculation holds for at initial recognition?

    Thank you.

  • Staff-T1Staff-T1
    If you are recognized as an expense, all of it is considered in the insurance service expenses, none of it is in the LRC. Otherwise, the deferred portion goes into your LRC = UEP - DAC formula.

    For the second question, you always only consider the premiums received and not the whole written premium for the PAA LRC. As of time 0, you only receive half of the WP(1250) and not the whole amount, which means your UEP is correspondingly 1250. Likewise after a year, you now receive the other half of the premium and your UEP is again 1250. The unearned portion relates to the amount unearned from the premiums received, not the written premium
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