Liability for Incurred Claims (LIC)
The components of LIC. In the battle cards, it says:
1. an unbiased current estimate of future cash flows (this is NOT the same as FCFs)
2. adjustment for discounting
3. a risk adjustment
However, in the "IFRS17 - the accounting model in one page" says LIC = FCFs + Risk Adjustment.
Can I confirm that component 1 + 2 = FCFs?
Comments
Yes, that's correct.
how is this any different from the LRC for GMA? where LRC = PV of future CF + discounting adjustment + risk adjustment?
There is no difference between LIC and LRC under GMA
So the FCF in LIC and LRC are the same?
I'm a bit surprised to hear that. I thought that the Future Cashflow to be used in LIC was only for the expected payment on incurred events. And the opposite for the LRC, that was the PV of expected future cashflow on claims that are yet to occur.
FCFs just means the fulfilment cash flows, or the risk adjusted, discounted, future cash flows. Your future cash flows on the LIC are the expected payments on incurred claims + recoveries, while for LRC it is the difference between premiums and expected payments. They represent the same thing, your difference between inflows and outflows, but these inflows and outflows are not the same for LIC and LRC
am I right to say that LIC is similar to FCF but LIC has undiscounted future CF but FCF has discounted future CF? and both of them include discounting and RA for non-financial risk?
under IFRS 17, LRC = (premiums received) – (insurance acquisition cash flows)
under CIA, LRC = (premiums received) - DAC
but CIA interprets LRC as unearned premium - DAC
am I understanding it correctly?
No, the LIC = FCF since there is no CSM. So yes, the LIC would have discounting and RA
PAA LRC = UEP - DAC. There is no other definition
Is LRC = premium received - insurance acq. CF's the same as UEP - DAC? In other words, does premium rec'd equal UEP and does insurance acq. CF's equal DAC?
Insurance acquisition costs are not necessarily ALL part of the DAC. DAC stands for deferred acquisition costs, and you would also have non deferrable acquisition costs. UEP = Premium Received - Earned Premium.
Ok thank you, so the formula for PAA LRC we should always be using is UEP - DAC?
Correct