Q22
For part (a), do we first calculate the LRC in order to derive the CSM using (LRC − FCF)? Since LRC = LRC excl. LC = FCF + CSM, we can calculate LRC excl. LC as (UEP − DAC)?
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For part (a), do we first calculate the LRC in order to derive the CSM using (LRC − FCF)? Since LRC = LRC excl. LC = FCF + CSM, we can calculate LRC excl. LC as (UEP − DAC)?
Comments
To calculate the CSM at initial recognition, you first calculate the FCF. the CSM is just the negative value of that FCF.
You're mixing up the two different methods here.
LRC = FCF + CSM for GMA
LRC excl LC = UEP - DAC for AA
LRC under GMA is not necessarily = to LRC excl LC
(1) CSM at initial recognition
At initial recognition, is the CSM always equal to the negative of the fulfilment cash flows (−FCF), or is this only the case when the FCF is negative?
(2) CSM after the first premium payment
How is the CSM of 392.5 determined after the first premium payment is made? It seems that we calculate the LRC using the UEP -DAC, and then back calculate the CSM. If that’s correct, why are we allowed to use the PAA method to measure the LRC in this way?
2) No it is not calculated using UEP - DAC and no you cannot measure the GMM LRC in this way. You need to calculate the FCF before time 0 and take the negative of that for the CSM