PV(Future Cash Flows)
Sorry in advance for the long question. I am a bit confused about what PV(Future CFs) component of the FCF actually represents based on the context.
Sometimes, it seems to include all inflows (e.g., premiums) and outflows (e.g., claims) that the insurer is expected to receive or pay for a contract or a group of contracts. For example,
- When we say if FCF < 0 -> Net inflow -> Profitable -> Need CSM (mentioned here https://battleactsmain.ca/vanillaforum/discussion/422/onerous-contracts#latest)
- In the following formula from CIA IFRS 17 – LRC (Section 4.8):
- LRC = FCF + CSM = (Future cash inflows - Future cash outflows + effect of discounting - RA) + CSM
Sometimes, it seems to include only future CFs related to liabilities (i.e., what the insurer expects to pay in the future). For example,
- In the definition of building block 1, the text says “Conceptually, this is similar to the current CIA liability without provisions for adverse deviations (PfADs)” and the wiki says “similar to PV(liabilities) without PfADs”, which in my opinion doesn’t include expected future cash inflows like premiums. Moreover, the definition of building block 3 explicitly mentions “At contract inception, if the FCF including all cash flows of the contract (i.e., including acquisition expenses and all premiums) is less than zero, the CSM is established to offset that negative amount so there is no front-ending of profit.”. They seem to imply that the basic definition of FCF would only include future CFs related to liabilities but when the goal is to determine whether a contract is profitable or onerous, we need to include all future CFs.
Finally, whenever we use the term FCF to calculate some insurance liability account (e.g., LRC = FCF + CSM), I would find counter-intuitive that FCF would include both what the insurer expects to receive and pay because generally liability accounts represent what the insurer expects to pay only (on a net basis of course). This logic appears to be consistent with the LRC definition provided in the intro of CIA IFRS 17 - LRC.
Thanks
FYI @olidude3121
Comments
I will have to review the different source texts and get back to you on this in the next day or two.
Thanks!
I believe you are correct and I have emailed the Exam 6-Canada exam committee. I will let you know when (if) I receive a response. Thanks for bringing this to my attention.
Sounds good. Thanks Graham.
I received a response from the exam committee and have inserted a note into the wiki here: