DPAE and Annual Statements

victory1995victory1995
in CIA.PrLiabs

Does anyone know how the DPAE (specifically in the case that there IS a premium deficiency) feeds into annual reporting like the MCT? Is any premium deficiency just added to the Premium Liabilities (ie. (net prem liab + prem def.)* 20% risk margin = target risk margin for prem liabs?). Thanks!

Comments

  • grahamgraham

    The presentation in the CIA's source text for premium liabilities is a little hard to follow, but if you look in the Excel spreadsheets that come with that reading, the premium liabilities are defined as:

    • premium liabilities = APV + FutRe + maintenance + contingent commissions

    Then the equity in the UPR is defined as:

    • equity in the UPR = net UPR - premium liabilities

    If the equity is positive, we call it DPAE but if it's negative then it's a premium deficiency. So the answer to your question is that you don't have to add the premium deficiency before multiplying by the percentage risk margin in the MCT calculation for premium liability risk. You use the value of premium liability on its own.

    In terms of reporting the DPAE or PDR (only one of these can be non-zero), the value of DPAE is reported on the asset side of the balance sheet in Exhibit 20.10 (line 43) of the annual statement and PDR is reported on the liability side of the balance sheet in Exhibit 20.20 (line15).

    There is a little more discussion on that in this forum post:

  • victory1995victory1995

    Thank you so much Graham!

  • oxalisoxalis

    I have a hard time making sense of this equation: UPR+UnComm - prem liab = equity in net UPR, it seems to me that the 3 items on the left side of the equation are all liability items? I have a doubt about whether to record premium liability as asset or liability, since it's deferred liability so should be considered as an asset item? I'm so confused about all the accounting concept...

  • grahamgraham

    I agree it can be confusing. Overall, my advice here is make sure you can apply the formulas given in the wiki article to calculate DPAE/PDR. If the result is positive, then we call the value DPAE and it's an asset. If the result if negative, we call it PDR and it's a liability.

    You have to understand the difference between claims liabilities and premium liabilities.

    • claims liabilities are liabilities for accidents that have already happened (and relate to the expired portion of policies)
    • premium liabilities are for accidents that have not yet happened and related to the unexpired portion of policies.)

    This whole DPAE/PDR calculation is basically to determine whether the premiums are sufficient to cover future claims. As an example:

    • Suppose a policy is written on Jan 1 for $500.
    • Suppose the current date is Apr 1 so one-quarter of the policy is expired and earned premium = 0.25 * $500 = $125
    • If a claim occurred on Jan 15 the amount of this claim (whatever it is) would be a claim liability.
    • Now, because the current date is only Apr 1, we still have unearned premium of 0.75 * $500 = $375 and it's possible there could be a claim between Apr 1 and the expiration date of Dec 31.

    Here is where the concept of DPAE/PDR comes in:

    • If you calculate that the expected value of a claim against this policy between Apr 1 and Dec 31 is say $300, then the unearned premium of $375 covers the loss, and DPAE = $375 - $300 = $75 and this is an asset.
    • But if you calculate the expected value of a claim against this policy between Apr 1 and Dec 31 to be say $400, then the unearned premium of $375 doesn't cover the loss so we instead have DPAE = $375 - $400 = -$25 but since it's negative we call it PDR (not DPAE) and it is a liability.

    Hope that helps, but like I said above, the main thing is to make sure you can do the DPAE/PDR calculation. If you practice it then the concepts will gradually become clearer over time.

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