Eligibility for the premium allocation approach

The premium allocation approach is permitted if, and only if, at the inception of the group of contracts one of the following conditions are met [IFRS 17 53]:

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Premium allocation approach

The premium allocation approach is a simplified form of measuring insurance contracts in comparison with the general model. Use of the premium allocation approach is optional for each group of insurance contracts that meets the eligibility criteria.

Differences between the premium allocation approach and the general model include:

  • Simplified measurement of the liability for remaining coverage for groups of insurance contracts that are not onerous. The overall liability measurement of the premium allocation approach and the general model would the same for groups of contracts that are onerous (see ‘Onerous insurance contracts’ and ‘Measurement of remaining coverage’).
  • An option not to adjust future cash flows in the liability for incurred claims for the effect of the time value of
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Onerous insurance contracts

Initial recognition

An insurance contract is onerous at the date of initial recognition if the fulfilment cash flows allocated to the contract, including any previously recognised acquisition cash flows and any cash flows arising from the contract at the date of initial recognition in total are a net outflow.

Onerous contract loss recognised immediately in profit or loss

Risk adjustment

Present value of

estimated cash inflows

Present value of

estimated cash outflows

The onerous contract test is performed at the level of the IFRS 17 group (as described in section 4). Under existing IFRS 4 reporting, entities apply liability adequacy tests at an aggregation level determined by previously grandfathered accounting policies. IFRS 17 is likely to require a

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Contractual service margin

The fourth element of the building blocks in the general model (see ‘General model of measurement of insurance contracts‘) is the contractual service margin (the CSM). This is a component of the asset or liability for the group of insurance contracts that represents the unearned profit the entity will recognise as it provides services in the future.

1. Initial recognition

An entity should measure the CSM on initial recognition of a group of insurance contracts at an amount that, unless the group of contracts is onerous (see ‘Onerous insurance contracts’), results in no income or expenses arising from [IFRS 17 38]:

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Risk adjustment for non-financial risks

The third element of measuring fulfilment cash flows in the general model (see ‘General model of measurement of insurance contracts‘) is a risk adjustment for non-financial risk.

The risk adjustment for non-financial risk is the compensation that the entity requires for bearing the uncertainty about the amount and timing of cash flows that arise from non-financial risk [IFRS 17 37]. The risks covered by the risk adjustment for non-financial risk are insurance risk and other non-financial risks such as lapse risk and expense risk [IFRS 17 B86].

In theory, the risk adjustment for non-financial risk for insurance contracts measures the compensation that the entity would require to make it indifferent between [IFRS Read more

Cash flows within the contract boundary

Cash flows within the boundary of an insurance contract are those that relate directly to the fulfilment of the contract, including those for which the entity has discretion over the amount or timing. IFRS 17 provides the following examples of such cash flows [IFRS 17 B65]:

  • Premiums and related cash flows Cash flows within the contract boundary
  • Claims and benefits, including reported claims not yet paid, incurred claims not yet reported and expected future claims within the contract boundary Cash flows within the contract boundary
  • Payments to policyholders (or on behalf of policyholders) that vary depending on underlying items
  • Payments to policyholders resulting from embedded derivatives, for example, options and guarantees
  • An allocation of insurance acquisition
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