Discounting LIC/LRC questions
Under current practice we discount LIC (unpaid claims) and we discount LRC (net premium liabilities). Under IFRS 17, for LIC we still need to discount (calculating the FCF), and for LRC we don't need to discount if we are using the PAA method. Is this correct?
Also, why is the discounting of LIC related to LRC?
In IFRS17 lecture, " IFRS 17: ignore discounting and financial risk for LIC if:
- PAA is used for LRC
- LIC cash flows are received ≤ 1 year within incurred date of claims"
Comments
No, you'd need to discount LRC under PAA if you have a loss component.
That's a good question - I think the source does not go into too much detail with regards to GMM vs PAA for LIC. I would just accept it as is for the purpose of your exam. Maybe the new IFRS17 papers will make it clearer in the Fall
Hopefully they will! Thanks
so do we have a clearer answer for this question of "why is the discounting of LIC related to LRC"?
Discounting of LIC is related to the LRC if you are using PAA and expect claims to be settle within 1 year of being incurred (basically very short-tailed lines).
In practice, LIC is always discounted
would it be the other way around? Discounting of LIC is NOT required if you are using PAA and expect claims to be settle within 1 year of being incurred?
Yeah you don't discount in that case