Question regarding example on LRC under PAA - Alice's Example
For part b) of the question, why do we not amortize as well the non-directly attributable acquisition expenses, like we do in part a) for the directly attributable expense?
For part c) how is the carrying amount at the start of reporting period =0? Isn't LRC not equal to zero at the start of the reporting period but then flows into LIC? The only logic I can think of is if we are talking about a new insurer who recently started writing business.
Comments
In the example, it is stated that non-directly attributable acquisition expenses are paid at inception.
Carrying amounts are 0 at the beginning of each period because we are calculating LRC on a group of contracts basis and not at a portfolio level (Each Calendar Year for each group of contract gets its own LRC). You can think of the carrying period at the start of a reporting period as the amount of LRC at time = -1, and we are now trying to calculate the LRC at time = 0. So LRC will not be 0 at time 0, but it will definitely be 0 at time -1.
Thank you, for the first part, do we not amortize because it is non-directly attributable even though they are paid at inception?
Well I think the key phrase here is "paid at inception" and not "non-directly attributable"
If you pay everything at inception then it is already realized and there is nothing left to do
But the Directly attributable acquisition expenses also mentions paid at inception?
@olidude3121
I think you can only defer directly attributable acquisition expenses.
From CIA.IFRS17 p.12
"The amount of acquisition expenses considered deferrable could be different. IFRS 17 defers acquisition expenses considered directly attributable to the portfolio of insurance"
Oh yeah whoops. I've read the IFRS17 notes again and willm7 is right. Disregard my earlier comment
Since we know the LRC = 400, and the group of policies are profitable, how does the CSM component fit into all of this?
Is CSM booked as an asset = 400 at inception for the group of contracts, so at the end of year 1, CSM = 0 since it's been amortized over the whole and recognized as profit? But then what about the actual profit of the year = 295?
So I'm not sure what you mean by this because under PAA LRC there wouldn't be a CSM. CSM is only applicable when you are under the GMM approach
Ahh yes sorry, suppose this was using GMA, would we book the CSM as 400?
Your CSM would be recalculated at the end of the coverage period. If your FCFs are coming in higher than expected then I guess your CSM on the asset side will decrease (or be 0 if you are at the end of your term).
On Page 17 of the LRC note, you'd adjust your CSM at the end of a period taking into account:
The amount recognized as insurance revenue because of the transfer of
insurance contract services in the period, determined by the allocation of the
contractual service margin remaining at the end of the reporting period (before
any allocation) over the current and remaining coverage period applying
paragraph B119. Under this step, the CSM at the end of the reporting period (before recognizing any amounts in profit or loss to reflect the insurance contract services provided in the period) is allocated equally to each coverage unit provided in the current period and those expected to be provided in the future. The amount allocated to coverage unit provided in the current period is recognized in profit or loss.
Your actual insurance revenue is taken into account and allocated here as profit. So asset side (400 -> 0). Actual Profit ( 0 -> 295)