PAA calculation

flipcatflipcat
in CIA.IFRS17

Hi Graham,

I don't find the specific subsection of IFRS17-PAA so I just ask here.

I don't understand what's in bracket: At initial recognition, premiums received would equal UEP.

For the policies with a monthly payment plan for example, should premium received be only small portion of UEP?

Therefore the two formulas:
(1) premiums received (at initial recognition)
(2) minus acquisition cash flows at that date (unless already expensed)
(3) plus any assets for acquisition cash flows derecognized minus liabilities previously recognized

and

LRC = [UEP – (premiums receivable)] – DAC
are equivalent because
UEP-premium receivable = premiums received and (2)+(3) looks like DAC?

Thank you!

Comments

  • grahamgraham
    edited March 2021

    That's an insightful interpretation. Intuitively, it looks like (UEP - receivables) is intended to match premiums received, and that (2)+(3) is intended to match DAC.

    If you try to work out an example with monthly payments however, the formula:

    • (UEP - receivables) = premiums received

    still only seems to work at the very beginning of the contract. Let's assume total premium charged = 120.

    Then at contract inception:

    • UEP = 120
    • premiums receivable = 120
    • premiums received = 0

    So UEP-receivables = 120 - 120 = 0 = premiums received, and it works.

    But after 1 month:

    • UEP = 110
    • premiums receivable = 110
    • premiums received = 10

    So UEP-receivables = 110 - 110 = 0 <> 10 so the it doesn't work anymore.

    And notice that if you rearrange your formula, you get:

    • UEP = (premiums receivable) + (premiums received)

    But UEP reduces to 0 over the life of the contract whereas the right side of the above formula should always equal to total premium charged.

    I'm sure there is a way to resolve this but it may require information that is beyond the scope of the source text.

  • flipcatflipcat

    Thanks, Graham! The example is very helpful!

    The formula: (premiums received) = (unearned premiums) – (premiums receivable)
    under Section 5: LRC: PAA and GMA Considerations in IFRS17-1 should have the same issue of being valid only at initial recognition?

    Besides, is this formula:
    total premium charged = EP + UEP = (premiums receivable) + (premiums received)
    valid throughout the lifetime of contract?

  • grahamgraham

    That's what it looks like to me, that the first formula only makes sense at initial recognition. But if I'm being honest, I'm not 100% certain. This IFRS material is new to most Canadian actuaries and I'm learning it along with you guys using the same sources. This will all be sorted out over time but at the present I don't think anyone is quite on sure footing.

    For the second formula you listed, it may depend on whether it's being applied to a particular contract or to a set of contracts on a CY basis such as in the annual statement.

    • For a single contract at a particular point in time, both sides of the equation should always equal the total premium charged so the formula would always be valid, but it doesn't contain any real information. It's just 2 different ways of expressing the total premium.
    • For a group of contracts at year-end in the annual statement, I don't believe it would hold in general. You might have earnings split between 2 years, but with all the premiums being received at the inception of the contract. Then at year-end, the right side of the equation would have "premiums receivable" = 0 so "premiums received" may be greater by itself than EP + UEP.

    My advice on this however is not to worry too much about this for now. It's getting into the weeds of accounting. Instead, focus on things that are more easily testable on the exam - things that have a definite answer. (And if something like this does comes up on the exam, the safest bet is to quote the text directly.)

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