LRC formula
Hi,
There are 2 formulas for LRC:
1.LRC = FCF + CSM (under GMA approach)
2.LRC = unearned premium - premium receivable - DAC
What's the connection between the 2 formula? Is #2 the general formula that applies to both GMA and PAA approaches? and #1 is only valid under GMA?
Also, are the terms GMA and PAA only relevant under IFRS, and non-existant under CIA? when we compare the differences in liabilities measurements under the 2 guidelines, it seems that we use (UEP-DAC) to refer to PAA under CIA?
criteria:
IFRS 17: allows PAA for short-term contracts without testing whether PAA reasonably approximates GMA
CIA: allows (UEP – DAC) to be used only if it's a reasonable approximation to the explicit valuation approach
Thank you,
Comments
Hi,
Formula 1: LRC under GMA approach
Formula 2: LRC under PAA simplification
You would only be able to use formula 2 for the LRC if you meet the PAA eligibility test for LRC or the prescribed conditions. If not,(ex. policies with duration > 1 year, onerous contracts or where the PAA differs materially from the GMA approach) you would have to go with formula 1.
IFRS17 is the accounting standard while CIA is the actuarial body. CIA just interprets the IFRS standards (:
But to your question, it's making a comparison between IFRS17 vs what is currently in practice now
Under IFRS 17, you can use LRC = UEP - DAC which is just the PAA LRC excluding loss component if you meet the criteria set out for PAA eligibility. For non-onerous contracts, the loss component is necessarily 0.
Under the old CIA standard however, you can only use UEP - DAC if its a good approximation to the valuation method, regardless of coverage period.
To clarify, you would for example be able to use UEP - DAC for a 6 month contract under IFRS17 regardless of whether it approximates the GMA method, but not under current CIA practice if it does not approximate the valuation method.
Hi,
shall we change the battlecards 13 for reading CIA.IFRS then? It currently says the formula for LRC = UEP-premium receivable -DEC, but does not specify valid for PAA only
Thanks
Ok, I've edited the BattleCard to reflect that the formula is valid for PAA only. Thx!
LRC = unearned premium - premium receivable - DAC according to the CIA source reading, we meant under IFRS17?
The battlecard should say that LRC = UEP - DAC and is only valid for PAA. The Battlecard is not correct @graham
I'm not sure what's wrong with BattleCard 13. This is from page 12 of the source text:
That's interesting - This is in contradiction to the sample excel. Also, when we calculate PAA LRC for actual financial reporting in the industry it is UEP - DAC. The source is probably wrong here ~
Paragraph 55 of the standard states that PAA LRC = UEP - DAC so Im pretty sure the source is wrong
Oh, I see.
(If the source is wrong, that would be for the CAS to correct so there's nothing I can do here. I believe the graders would give credit on the exam for answers consistent with the source even if the source is wrong.)