Thank you sir for this useful summary of the PAA approach. I would love it if you explained a bit further why claims do not feature in the PAA approach. Surely I thought they might form the LIC even for contracts that are PAA eligible. Thank you for taking time to create this video. A truly valuable summary of the PAA approach.
Hi Robert, Good question! They do actually form as part of the LIC in the PAA as you pointed out. Were there other topics that you feel that you would like to be covered in the future? I'll actually be doing an updated (and more professional) talk of the PAA vs the GMM on the 2nd of December via the FSAA. The link is here: fsaa.com.au/event/49748/ifrs-17-webinar-3-mechanical-applications-online-only
Thank you for the knowledge sharing. However, for the LfRC at end of year 1, I was expecting to see 500 and not 400. I think you should have deducted 400 from 800 + 100 and not 500. 500 is somewhat a gross premium for the first year i.e. it includes provision for commission for the first year whereas the 800 + 100 has the first year commission of 100 deducted. So deducting 500 appears like a double deduction of commission. I also note that LfRC is the reserve in respect of the future obligations, which in this case are claims, expenses and future commission accrual i.e. I do not think the LfRC of 400 is sufficient to cover those obligations. Does the IFRS 17 balance sheet show insurance acquisition asset. If not, then the LfRC=400 would make sense.
Hi Shelton, Good to see you working through the example! The LfRC under the PAA at the end of each period depends on: 1. The premiums received (which increases the LfRC). In this case this is $1,000 2. The premiums earned (which decreases the LfRC). In this case this is $500 due to earning half of the total amount each year. 3. The acquisition costs paid (which decreases the LfRC). In this case this is $200 4. The acquisition costs amortised (which increases the LfRC). In this case this is $100 due to amortising half of the total amount each year. If you put it together, it's $1,000 minus $500 minus $200 plus $100 which equals to the $400. The example in the video splits the $400 into the original LfRC at initial recognition (which was $800) and then the movement in subsequent measurement (moving it to $400). The paragraphs of IFRS 17 that specify this can be found in paragraph 55 (a) and (b). You're 100% right that the LfRC is the reserve in respect of future obligations, but what you've described is actually the GMM approach :) Basically the conceptual difference between the PAA and the GMM is that while they both try to estimate the same thing (the reserve in respect of the future obligations), the PAA arrives at this quantum using a retrospective approach (i.e. premiums and acquisition costs paid/received and earned) while the GMM arrives at this quantum using a prospective approach (i.e. discounting those future cash flows to the present). You're also right that the insurance acquisition costs are now embedded within the measurement of the LfRC under IFRS 17. By the way, there's some more free videos on our website where I gave 3 separate seminars (with slides) during 2022: www.realvalueconsulting.com/free-resources
![IFRS 17: Simplified accounting for contracts with short coverage periods [Part 1 of 2]](/img/1.gif)
Thank you sir for this useful summary of the PAA approach. I would love it if you explained a bit further why claims do not feature in the PAA approach. Surely I thought they might form the LIC even for contracts that are PAA eligible.
Thank you for taking time to create this video. A truly valuable summary of the PAA approach.
Hi Robert,
Good question! They do actually form as part of the LIC in the PAA as you pointed out. Were there other topics that you feel that you would like to be covered in the future?
I'll actually be doing an updated (and more professional) talk of the PAA vs the GMM on the 2nd of December via the FSAA. The link is here:
fsaa.com.au/event/49748/ifrs-17-webinar-3-mechanical-applications-online-only
Thank you for the knowledge sharing. However, for the LfRC at end of year 1, I was expecting to see 500 and not 400. I think you should have deducted 400 from 800 + 100 and not 500. 500 is somewhat a gross premium for the first year i.e. it includes provision for commission for the first year whereas the 800 + 100 has the first year commission of 100 deducted. So deducting 500 appears like a double deduction of commission. I also note that LfRC is the reserve in respect of the future obligations, which in this case are claims, expenses and future commission accrual i.e. I do not think the LfRC of 400 is sufficient to cover those obligations. Does the IFRS 17 balance sheet show insurance acquisition asset. If not, then the LfRC=400 would make sense.
Hi Shelton,
Good to see you working through the example! The LfRC under the PAA at the end of each period depends on:
1. The premiums received (which increases the LfRC). In this case this is $1,000
2. The premiums earned (which decreases the LfRC). In this case this is $500 due to earning half of the total amount each year.
3. The acquisition costs paid (which decreases the LfRC). In this case this is $200
4. The acquisition costs amortised (which increases the LfRC). In this case this is $100 due to amortising half of the total amount each year.
If you put it together, it's $1,000 minus $500 minus $200 plus $100 which equals to the $400. The example in the video splits the $400 into the original LfRC at initial recognition (which was $800) and then the movement in subsequent measurement (moving it to $400). The paragraphs of IFRS 17 that specify this can be found in paragraph 55 (a) and (b).
You're 100% right that the LfRC is the reserve in respect of future obligations, but what you've described is actually the GMM approach :)
Basically the conceptual difference between the PAA and the GMM is that while they both try to estimate the same thing (the reserve in respect of the future obligations), the PAA arrives at this quantum using a retrospective approach (i.e. premiums and acquisition costs paid/received and earned) while the GMM arrives at this quantum using a prospective approach (i.e. discounting those future cash flows to the present).
You're also right that the insurance acquisition costs are now embedded within the measurement of the LfRC under IFRS 17.
By the way, there's some more free videos on our website where I gave 3 separate seminars (with slides) during 2022: www.realvalueconsulting.com/free-resources