IFRS 17IE Measurement insurances with premium allocation

Last Updated on 10/02/2020 by 75385885

IFRS 17IE Measurement insurances with premium allocation

Measurement of groups of insurance contracts using the premium allocation approach

Example 10—Measurement on initial recognition and subsequently of groups of insurance contracts using the premium allocation approach (paragraphs 55–56, 59, 100 and B126)

IE113 This example illustrates the premium allocation approach for simplifying the measurement of the groups of insurance contracts.

Assumptions

IE114 An entity issues insurance contracts on 1 July 20×1. The insurance contracts have a coverage period of 10 months that ends on 30 April 20×2. The entity’s annual reporting period ends on 31 December each year and the entity prepares interim financial statements as of 30 June each year.

IE115 On initial recognition the entity expects:

  1. to receive premiums of CU1,220;
  2. to pay directly attributable acquisition cash flows of CU20;
  3. to incur claims and be released from risk evenly over the coverage period; and
  4. that no contracts will lapse during the coverage period.

IE116 Furthermore, in this example:

  1. facts and circumstances do not indicate that the group of contracts is onerous, applying paragraph 57; and
  2. all other amounts, including the investment component, are ignored for simplicity.

IE117 Subsequently:

  1. immediately after initial recognition the entity receives all the premiums and pays all the acquisition cash flows;
  2. for the six-month reporting period ending on 31 December 20×1 there were claims incurred of CU600 with a risk adjustment for non-financial risk related to those claims of CU36;
  3. for the six-month reporting period ending on 30 June 20×2 there were claims incurred of CU400 with a risk adjustment for non-financial risk related to those claims of CU24;
  4. on 31 August 20×2, the entity revises its estimates related to all claims and settles them by paying CU1,070; and
  5. for simplicity, the risk adjustment for non-financial risk related to the claims incurred is recognised in profit or loss when the claims are paid.

IE118 The group of insurance contracts qualifies for the premium allocation approach applying paragraph 53(b). In addition, the entity expects that:

  1. the time between providing each part of the coverage and the related premium due date is no more than a year. Consequently, applying paragraph 56, the entity chooses not to adjust the carrying amount of the liability for remaining coverage to reflect the time value of money and the effect of financial risk (therefore no discounting or interest accretion is applied).
  2. the claims will be paid within one year after the claims are incurred.

Consequently, applying paragraph 59(b), the entity chooses not to adjust the liability for incurred claims for the time value of money and the effect of financial risk.

IE119 Further, applying paragraph 59(a), the entity chooses to recognise the insurance acquisition cash flows as an expense when it incurs the relevant costs.

Analysis

IE120 The effect of the group of insurance contracts on the statement of financial position is as follows:

IFRS 17IE Measurement insurances with premium allocation
  1. The amount of cash at the end of December 20×1 of CU(1,200) equals the premium received of CU(1,220) on 1 July 20×1 plus the acquisition cash flows paid of CU20 on 1 July 20×1.
  2. The amount of cash at the end of December 20×2 of CU130 equals the net cash inflow on 1 July 20×1 of CU1,200 minus claims paid on 31 August 20×2 of CU1,070.
  3. The insurance contract liability is the sum of the liability for remaining coverage and the liability for incurred claims as illustrated in the table after paragraph IE122.

IE121 Applying paragraph 100, the entity provides the reconciliation:

  1. between the amounts recognised in the statement of financial position and the statement of profit or loss separately for the liability for remaining coverage and the liability for incurred claims; and
  2. of the liability for incurred claims, disclosing a separate reconciliation for the estimates of the present value of the future cash flows and the risk adjustment for non-financial risk.

IE122 A possible format of the reconciliation required by paragraph 100 is as follows:

IFRS 17 Reconciliation insurance contracts financial position profit or loss
  1. See the table after paragraph IE123 for the calculation of insurance revenue.
  2. Applying paragraph 55, the entity measures the liability for remaining coverage at the end of December 20×1 of CU488 as premiums received in the period of CU1,220 minus the insurance revenue of CU732. The entity does not include acquisition cash flows in the liability for remaining coverage because it chooses to expense them when incurred applying paragraph 59(a).
  3. Insurance service expenses of CU636 for the period July 20×1 to December 20×1 comprise the incurred claims of CU600 and a risk adjustment for non-financial risk of CU36.
  4. Insurance service expenses of CU424 for the period January 20×2 to June 20×2 comprise the incurred claims of CU400 and a risk adjustment for non-financial risk of CU24.
  5. Insurance service expenses of CU10 comprises:
    1. a gain of CU60—the risk adjustment for non-financial risk related to the liability for incurred claims recognised in profit or loss because of the release from risk; and
    2. a loss of CU70—the difference between the previous estimate of claims incurred of CU1,000 and the payment of those claims of CU1,070.

IE123 The amounts included in the statement of profit or loss are as follows:

The amounts included in the statement of profit or loss
  1. Applying paragraph B126, the entity recognises insurance revenue for the period as the amount of expected premium receipts allocated to the period. In this example, the expected premium receipts are allocated to each period of coverage on the basis of the passage of time because the expected pattern of the release of risk during the coverage period does not differ significantly from the passage of time. Consequently, insurance revenue equals CU732 (60 per cent of CU1,220) for the six months ended December 20×1; and CU488 (40 per cent of CU1,220) for the four months ended April 20×2.
  2. See the table after paragraph IE122 for the calculation of insurance service expenses. For the six months ended December 20×1 insurance service expenses comprise CU636 of the amounts recognised from the change in the liability for incurred claims and CU20 of acquisition cash flows recognised in profit or loss as an expense, applying paragraph 59(a).

 

 

Last Updated on 10/02/2020 by 75385885

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