Sample IFRS questions # 17
To calculate the direct unearned premium, the formula is prem received + prem receivable - insurance revenue.
To calculate the unearned premium under PAA, the formula is prem received - insurance revenue.
Is this difference because PAA is a simplified method so you don't need to include prem receivable?
Comments
No, your first formula is the most correct method. In most cases, the latter method refers to a policy after initial recognition but before the effective date, so there would not be any premiums receivable
How come in the sample solution, they don't discount the Future Acquisition Cost or DAC?
Is it because DAC already happened and cost is paid already so nothing to discount and for the Future acquisition for 2024, we are assuming the cost happens at the beginning of period since its acquisition cost (so in this case Jan 1, 2024) and our calculation date is Dec 31, 2023 so we don't need to discount it for one day?
How come premium receivable was not included in the PAA LRC excl LC part of the exhibit?
@user1
This is from the reading in "https://battleactsmain.ca/wiki6c/CIA.IFRS17-PAA"
For PAA LRC, you don't need to use Premium receivable.
This is the whole purpose of using PAA, because its much simpler. You don't have to project your future CF. LRC using PAA is a simple calculation
@NycxBattle
do you know what is the reason for this formula in the battlecard under IFRS 17 -1 for PAA?
Your screenshot and my screenshot is pretty much the same thing.
In this case the CAS solution is actually the same thing.
Because
UEP = Premium Received - Insurance Rev + Premium Receivable
If you substitute the expression above in your screenshot, the premium receivable cancels out each other and you are left with
LRC = Premium Received - Insurance Rev - Insurance Acq CF.
However I think this only true for a specific period.
Alternatively you can use formula in your screen in the excel question and it will give the same answer. Even if you change Premium receivable it will flow through
How come we dont amortize the 7500 of DAC over the life of the contract. At initial recognition PAA LRC would be Prem Recieved - DAC which is 55000-7500 = 47500. Insurance revenue of 50K is earned over the period and so we reduce LRC excl LC by 50K to -2500. But arent we missing the Amortization of DAC? Otherwise LRC would reduce to -7500 (negative DAC) once all revenue has been earned and say on our balance sheet forever?
Why would you amortize DAC? Once the contract is finished there would no longer be any DAC so the PAA estimate is 0. If you are referring to the GMM method, the DAC is effectively amortized through the CSM
In this example we have 55000 in premium received and 7500 in DAC for policies effective in 2023. As we earn premium received we recognize it as insurance revenue and it reduces our LRC. I guess my question is why do we not amortize the 7500 in DAC and recognize it as ISE to be consistent?
Subsequent measurement LRC =
Premiums received -DAC - Insurance Revenue + Amortization of acquisition cash flows
We would have 55000-7500-50000 + X = -2500 + X as LRC excl LC
The problem is we are not given an idea on how to amortize DAC although I assume the only assumption we could make is that it is amortized as premium is earned in which case only 5/55 (approx 10%) of the remaining acquisition would remain unamortized at the end of the period.
We would then have LRC excl LC = -2500 + 6818 = 4318
This would make more sense as approx 5000 premium already received is left unearned so it doesn't make sense to have 7500 of deferred acquisition cost.
A bit unrelated but I wanted to add incase you had any thoughts:
There was a question that was asked in another form on this same sample question. As part of determining FCF we add DAC net of cancellations and then subtract DAC gross of cancellations, which seems odd. The forum concluded suggesting this was a mistake.
If we build off this interpretation above and assume DAC has been 100% amortized by the end of the period (Dec 31 2023) then maybe what the CAS is doing here makes more sense. Effectively there is no longer any DAC to be recognized as an expense in the future since it has been 100% amortized and by adding net and subtracting gross we are recognizing an asset/ future inflow for the DAC already expensed that will be recovered due to cancellation.
Either way something seems wrong as our LC would be 8,576.80 (FCF) - 4318 (the new LRC excl LC) which doesn't equal the CAS answer.
Because DAC is indirectly amortized already in the CSM through a reduction in bespoke CSM, which means that it follows the CSM amortization pattern. For your second point, that wouldn't really be possible because of my first statement.
I am not sure I understand what you mean when you say DAC is indirectly amortized in the CSM. Are you able to clarify?
Say there is a simple contract example with premium paid of 1000 at initial recognition and DAC of 250. I expect 4 claims of 100$ at the end of each quarter.
My Understanding:
This contract is profitable so CSM = 1000-250-4*100 = 350
I will assume it is amortized based on coverage units evenly throughout the period.
At initial recognition once premiums have been paid LRC = FCF + CSM = 250+4*100+350 = 1000
At the end of the first quarter LRC = 250 + 3100 +3509/12 = 812.5
At the end of the second quarter LRC = 250 + 2100 + 3506/12 = 625
At the end of the third quarter LRC = 250 + 100 + 350 *3/12 = 437.5
At the end of the year LRC = 250
If we do not amortize DAC we will not get LRC = 0 by end of period
How I Interpret Your Comment (which may not be right):
** DAC is not included in the calculation of CSM so that when we amortize the CSM we amortize DAC?
CSM = 1000-4*100 = 600
At initial recognition once premiums have been paid LRC = 4100+ 600 = 1000
At the end of Q1 LRC = 6009/12 + 300 = 750
End of Q2 = 6006/12 + 200 = 500
End of Q3 = 6003/12 + 100 = 250
End of Q4 = 0
My understanding is that this is the case only when Acquisition Costs are directly expensed and not deferred.
The DAC is an input into the CSM calculation which is then amortized.
For your first calculation:
Initial recognition LRC = 1000, CSM = 600
At time 0.25, LRC = 300 (Remaining claims left) +450 (Remaining CSM left) = 750.
Release of CSM = 600*0.25 = 150
Profit recognized = 150 - 62.5 (DAC amortization)
The DAC amortization is recognized as an expense that runs parallel to the CSM and offsets the profit recognized in the period
In Sample-17, what I assumed is that DAC is already amortized so basically the 7500 is the remaining DAC for the unearned portion of the policy. Then everything lines up.
Otherwise yeah on the last day of the policy LRC excl. LC would be -7500 which wouldn't make any sense. Also the way the solution applies the 75% to get the net DAC wouldn't make sense either.
Hope I wasn't totally wrong on that and hope that helps!
yes, 7500 is the remaining DAC
@Staff-T1 it seems like DAC should be included in CSM calculation.
CSM = Premiums - Claims - DAC = 1000-400-250 = 350 not 600
At least this is consistent with sample 22 of the IFRS17 sample questions (DAC is treated as an outflow for the purpose of calculating CSM). Could you confirm which approach is appropriate?
No, DAC is not included in the CSM calculation. I explained how DAC is handled in the presence of the CSM above. I do not know what part of sample 22 you are referring to but section a (GMA calculation) clearly does not use DAC as part of its CSM calculations
I apologize for going back and forth but I am still not sure I understand.
For sample 22a, total expenses = 320 which is treated as an outflow. This includes 250 of acquisition cost that is deferred and 70 of directly attributable maintenance expense.
The question states all acquisition costs are deferred and amortized over a 2 year period.
I interpret this as there being 250 of DAC that is included in determining the CSM. Am I mistaken?
Okay, I see what you mean. The difference in 22a is that you are calculating the CSM at time 0, and those DAC have not been incurred yet. Once they have been incurred, then they are no longer included in the CSM calculation
@Staff-T1 RA using margin method is calculated as (selected % * discounted loss & ULAE) in this example. While shouldn't RA = selected % * future cash flows? which would include premium. I find in CIA_Educational_Note excel exam RA = selected % * Mean for PV of Future Cash Flows. Could you explain? thank you
Which Excel file from the CIA are you referring to specifically? I checked the sample LRC file from the LRC paper and it is also calculating RA as RA%* Discounted losses and ULAE as I expected
Sample Question IFRS17 Q17. RA = selected % * Discounted losses and ULAE. My understanding of future cash flow = out flow - in flow, which means it needs to accounted for future premium. "RA = selected % * future cash flows" is cited in BA article
In this context here, future cash flows only refer to the losses. The reason is that there is no "uncertainty" around the premiums. They have to be paid. If the policyholder does not pay, then there is no coverage so there is no risk or uncertainty there