Sample Q29 c

fedwal12fedwal12
in CAS Sample IFRS 17 Questions

I have 2 questions for this:
1. Are we accounting for the LC in 2022 because the renewals are issued 2 months in advance, in this case group A2023 are issued in Nov2022?
2.Why is the "LC initial Recognition" of 60 counted as a positive (would've thought negative) for year 2022 for the Insurance service Result calculation?

Comments

  • Staff-T1Staff-T1
    1. That's correct. Onerous contracts are recognized immediately, rather than when premium is received which means that the LC appears on your balance sheet when renewals are issued for the next year.
    2. You are right. Recognition of the loss component will flow into the insurance service expense which should reduce the insurance service result. I believe the answer is correct here. 2022 should be negative, and the release of the LC should increase insurance service result
  • jppass2025jppass2025

    so the insurance service results is 490 for 2022, 950 for 2023 ?

  • Staff-T1Staff-T1

    That's right

  • guillam76guillam76

    In sample problem 22 we use the directly attributable expenses (D) to compute the ISR (E). Why in sample 29 don't we account for expenses in the calculation of ISR? Is it because there is no mention of amortization of expenses?

  • Staff-T1Staff-T1

    In sample 29, they included it in the incurred claims and it flows through into the ISE and correspondingly the ISR

  • sdeibertsdeibert
    edited September 12

    For part B, would it be wrong to label WP as LRC and Incurred Claims as FCF? When calculating the LC that is where my brain first went but I see the solution phrased it as profit or loss and then if loss, then establish a LC. They would both get you the same answer but maybe my way of doing it is not "technically" correct.

  • sdeibertsdeibert
    edited September 12

    Another question related to part C. I thought the loss component can't ever be negative. The purpose of the LC is to be added to premium received so that it equals FCF.

    Would the initial LC not be +60 and the LC recognized in 2023 be -60? Negative in 2023 only because it's being amortized and bringing the overall LC back down to 0...the LC itself would never have a reason to fall below 0.

    This would align with CAS's solution from rows 63-67, but I disagree with their formulas in row 68. Should the ISR formulas not be...
    3500-2950-60=490 (2022) and
    6700-5810-(-60)=950 (2023) ?

  • Staff-T1Staff-T1
    edited September 13
    You can't label WP as the LRC as there are more things that go into the LRC than just WP and they are not equal to each other. The LRC un theory is the net future cash flows of both claims and premiums. The idea behind the question is that if incurred losses > premium then it is pretty obvious that it is onerous (which means not profitable)
  • Staff-T1Staff-T1
    I will answer your second question in a bit - I would like some time to phrase it nicely
  • Staff-T1Staff-T1

    The loss component isn't negative in part C, that's just the release of the loss component into the ISE, not the actual loss component.

    "Would the initial LC not be +60 and the LC recognized in 2023 be -60? Negative in 2023 only because it's being amortized and bringing the overall LC back down to 0...the LC itself would never have a reason to fall below 0." This is what is being showed in the sample solution.

    Yup, you are right that row 68 is incorrect. The explanation is in the commentary at the end of the question - There are a few mistakes in the CAS sample solutions

  • CanAct06CanAct06
    edited September 19

    I am confused with the LC thing.

    So let's start with PAA.

    I thought if PAA is onerous, the LC is GMM LRC - PAA LRC?

    How come we are just doing FCF sum and not taking into account the UEP - DAC?

    I am getting very confused on when to use what formula. Can you explain step by step what formula to use under what circumstance?

    Both before/after IR, what is the formula?
    if PPA LC is:
    if GMM LC is:
    if PAA ~ GMM LC is:

  • Staff-T1Staff-T1

    Yes, if PAA is onerous then it is GMM LRC - PAA LRC
    We are not taking UEP - DAC into account because renewals are issued two months in advance and you need to book the loss component at initial recognition. At initial recognition, UEP and DAC are 0 which means the LRC is just the FCF.

    PAA LC = GMA LRC - PAA LRC
    GMM LC = FCF

    I don't know what you mean by "PAA ~ GMM LC" but the first two formulas are always true

  • CanAct06CanAct06

    I meant if PAA is a good approx. to GMM LC

    I am still confused. I thought for PAA, you can't use FCF, because you haven't received any of these premiums yet?

  • Staff-T1Staff-T1

    If PAA is a good approximation of the LRC, the LC is still GMA LRC - PAA LRC.

    I think you are mixing up the concepts. FCF is strictly a GMA concept and has nothing to do with PAA.

    Expounding the formula, at initial recognition (2 days before policy effective date):

    GMA LRC - PAA LRC = FCF - (UEP - DAC) = FCF - (0 - 0) = FCF

  • exam6addoilexam6addoil

    why UEP and DAC are 0 at initial recognition?

  • Staff-T1Staff-T1
    You haven't received any premium yet so there's no unearned premium and no acquisition costs
  • CanAct06CanAct06

    I know sometimes FCF is presented -ve, other times +ve. How do we know when to use which sign?

    Like for PAA LC = GMM(LRC) - PAA(LRC) -> I am assuming it is PV(Cash INF) - PV(Cash Out) - RA

    when would you use the other way?

  • Staff-T1Staff-T1
    It's fine to use it as either a positive or negative, as long as you are consistent throughout your calculations. I generally prefer PV(cash outflow) - PV(cash inflow) + RA as that is how it is most commonly defined.
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