Yes premiums receivable are used in the PAA and GMA measurement. Premium received is used in the FCF for the GMA. If your FCF is negative at initial recognition, then a positive CSM is booked. Otherwise you have a loss component instead. Does that make sense? I think you need to first understand what FCF is which is the difference in PV of your cash outflows and cash inflows for an insurance contract
But this concept of FCF being a difference of outflows and inflows is only applicable to LRC? FCF applied to LIC would only involve outflows (i.e. expected value of future claims from incurred losses)? So no inflow or premium component?
One more question, given that CSM is used to offset the negative liability (inflows > outflows) so that LRC = 0, in which cases it would make sense to reflect a negative value of LRC in the financial statements? Initially I supposed LRC would always be greater or equal than zero because of the presence of CSM but I have come across examples where that is not always the case. Like when you apply PAA, LC = 0 but LRC <0 since concept of CSM doesn't apply to non-onerous contracts under PAA. How would you interpret that? For example group C23 in LRC 6C_CIA_IRFS17_LRC_Illustrations. Is revenue recognized immediately under PAA as opposed to GMA where it is recognized over passage of time?
Conceptually, the way I see it is that the "true" LRC is represented by the GMA estimate. PAA is a simplification, which you can use as long as you are NOT onerous. So I don't see anything wrong with there being a negative LRC for PAA estimates, given that you cannot have a CSM. The whole purpose of the PAA simplification is to avoid the need for a CSM. Also, PAA revenue is recognized over time too, just like the GMA
I was reviewing this thread and the summary is that when in doubt assume FCF = PV(Outflows) - PV(Inflows) + RA
Could we please add a battlecard to reflect this? It seems like this thread is the only place it has been clarified and it would be a nice reminder as we review the material for the exam
Comments
Yes premiums receivable are used in the PAA and GMA measurement. Premium received is used in the FCF for the GMA. If your FCF is negative at initial recognition, then a positive CSM is booked. Otherwise you have a loss component instead. Does that make sense? I think you need to first understand what FCF is which is the difference in PV of your cash outflows and cash inflows for an insurance contract
But this concept of FCF being a difference of outflows and inflows is only applicable to LRC? FCF applied to LIC would only involve outflows (i.e. expected value of future claims from incurred losses)? So no inflow or premium component?
Well there is salvage and subrogation on the LIC side but for the most part, yes since there would be no premium inflows
One more question, given that CSM is used to offset the negative liability (inflows > outflows) so that LRC = 0, in which cases it would make sense to reflect a negative value of LRC in the financial statements? Initially I supposed LRC would always be greater or equal than zero because of the presence of CSM but I have come across examples where that is not always the case. Like when you apply PAA, LC = 0 but LRC <0 since concept of CSM doesn't apply to non-onerous contracts under PAA. How would you interpret that? For example group C23 in LRC 6C_CIA_IRFS17_LRC_Illustrations. Is revenue recognized immediately under PAA as opposed to GMA where it is recognized over passage of time?
Conceptually, the way I see it is that the "true" LRC is represented by the GMA estimate. PAA is a simplification, which you can use as long as you are NOT onerous. So I don't see anything wrong with there being a negative LRC for PAA estimates, given that you cannot have a CSM. The whole purpose of the PAA simplification is to avoid the need for a CSM. Also, PAA revenue is recognized over time too, just like the GMA
I was reviewing this thread and the summary is that when in doubt assume FCF = PV(Outflows) - PV(Inflows) + RA
Could we please add a battlecard to reflect this? It seems like this thread is the only place it has been clarified and it would be a nice reminder as we review the material for the exam
Sure @graham - The whole confusion is that the CIA papers are not consistent with defining the FCF. There's a long thread on this somewhere
I've added a link to this thread in a couple of places in this reading: