Appendice Example

wilsonchan18wilsonchan18
in CIA.IFRS17-PAA

Hi, just to confirm is it already given that the Group B, C and D are Non-Onerous, hence NO LC is required.

Thanks and Warm Regards,
Wilson

Comments

  • Staff-T1Staff-T1

    Which appendix are you referring to?

  • wilsonchan18wilsonchan18


    This one.

  • Staff-T1Staff-T1

    Yup, no onerous contracts for B,C and D

  • wilsonchan18wilsonchan18

    Thanks :smiley:

  • suomisuomi

    For Group A-2, since it is onerous, we have LC = GMA LRC - PAA LRC, does this imply if a group is onerous, the GMA estimate of LRC will always be > PAA estimate of LRC?

  • wilsonchan18wilsonchan18

    @suomi, I think so. I am thinking if it is profitable say having CSM, then should their LRC be the same?

  • Staff-T1Staff-T1

    @suomi yes because GMM LRC = LRC(Excluding LC) + LC
    LRC(excluding LC) = Simplified PAA LRC

    So LRC = FCF + CSM where the CSM is set such that profit at initial recognition is 0.
    If you have a CSM, your LRC = 0 since the CSM is set to be zero out your FCF

  • wilsonchan18wilsonchan18
    edited April 2022

    So If I have a CSM, LRC GMA is 0, and because LC=0, the LRC (excl. LC) is also 0.
    Hence, it means LRC GMA=LRC PAA =0? I am just trying think it through in my mind.

  • Staff-T1Staff-T1

    Yes to your first point. For your second point, if you have a CSM you will not be able to calculate a LRC PAA. Remember, the PAA simplification is to avoid having to calculate a CSM

  • suomisuomi

    I think this is getting a bit confusing. I was hoping we can break this down...

    For onerous contracts:
    1. GMA LRC = LRC(ex LC) + LC
    2. PAA LRC = LRC(ex LC)

    For non-onerous contracts:
    1. GMA LRC = FCF + CSM
    2. PAA LRC = UEP - Prem Receivable - DAC

    So what do you mean by "you will not be able to calculate LRC PAA" if you have a CSM?

  • Staff-T1Staff-T1

    For onerous contracts:
    1. Correct.
    2. PAA LRC = GMA LRC = LRC(ex LC) + LC

    For non-onerous contracts:
    1. Correct
    2. Correct

    If you are calculating a CSM, by definition it's not PAA but rather GMM. There is no such thing as a CSM under PAA

  • suomisuomi

    @Staff-T1 So for a non-onerous contract under PAA, can we front-load the profit?
    Ex. If our PAA LRC = -500 means we have a profit of $500 on the remaining portion of our contract, are we allowed to book it as profit immediately since there is no concern of CSM?

  • Staff-T1Staff-T1

    No - I don't think it is even possible to have UEP < DAC. And besides, one of the main themes of IFRS17 is to prevent insurers from front-ending profit

  • Staff-TSStaff-TS

    @Staff-T1

    For onerous contracts, if GMA LRC = LRC(ex LC) + LC, and PAA LRC = GMA LRC as you noted, how does it work in the appendice example such that LC = GMA LRC - PAA LRC?

    I am also curious about the equation "PAA LRC = UEP - Prem Receivable - DAC", as I have only seen this on papers that are no longer on the syllabus. Is this still current terminology / practice?

    Lastly, I noticed that the IC paper states: "When using the PAA, the entity should assume contracts in the portfolio are not onerous at initial recognition unless facts and circumstances indicate otherwise.", yet in this example and paper we talk about using PAA with onerous contracts. Do you have any clarification on what is correct here?

  • Staff-T1Staff-T1

    I'd refer to this discussion here for your first question
    https://battleactsmain.ca/vanillaforum/discussion/943/loss-component-under-paa#latest

    Your formula is not correct - It is PAA = UEP (Prem Received - EP) - DAC
    This formula is how you'd calculate PAA and yes it is current

    Well I don't see any contradiction here. If facts and circumstances indicate that the group of contracts are onerous then you can still use PAA, just with an adjustment to calculate the LC

  • lawtsmlawtsm

    You mentioned "If you have a CSM, your LRC = 0 since the CSM is set to be zero out your FCF" above.

    What does this mean? Why do we have to zero out FCF?

  • Staff-T1Staff-T1

    The CSM is set at the amount such that there is no profit or loss at initial recognition. If your PVFCF = -500, then your CSM is set to 500. At time 0, LRC = FCF + CSM = 0

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