Example on Page 35 of Source
Looking at the example I struggled to understand if they were asking for a PAA or GMA estimate of FCF. This falls under section 5 which is PAA so it is implied that is PAA eligible. Assuming this was an exam question would they need to specify that this contract was PAA eligible? The term is 3 years so it is not automatic.
Once PAA eligibility is established typically I would ignore financing components. However, because the contract is >12 months we would need to include financing adjustments unless otherwise stated? If this example has a coverage period of <12 months we wouldn't need to calculate IFE or a financing component on insurance revenue right?
Comments
If this comes up in an exam, you can automatically assume it is PAA eligible. If a test needs to be done to determine PAA eligibility it would be really obvious as you would be provided with GMA and PAA estimates side by side.
Yes that's right. No financing component needs to be calculated if coverage is < 1 year. Honestly in the exam it would be really obvious if they wanted you to calculate the financing component so I wouldn't worry. The trigger to calculate a financing component is that the question needs to state that there is a gap between when premium is received and service is provided of more than one year and this must be clear. If it's not obvious, you can just not include financing adjustments when calculating the PAA LRC.