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 (look right here), at the inception of the group: [IFRS 17:53]

1. the entity reasonably expects that this will be a reasonable approximation of the General Model, or
2. the coverage period of each contract in the group is one year or less

Where, at the inception of the group, an entity expects significant variances in the fulfilment cash flows (FCF) during the period before a claim is incurred, such contracts are not eligible to apply the PAA. [IFRS 17:54]

Using the PAA, the liability for remaining coverage shall be initially recognised as the premiums, if any, received at initial recognition, minus any insurance acquisition cash flows. Subsequently the carrying amount of the liability is the carrying amount at the start of the reporting period plus the premiums received in the period, minus insurance acquisition cash flows, plus amortisation of acquisition cash flows, minus the amount recognised as insurance revenue for coverage provided in that period, and minus any investment component paid or transferred to the liability for incurred claims. [IFRS 17:55]

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 money and financial risk if those cash flows are expected to be paid or received in one year or less from the date they are incurred (see ‘Measurement of remaining coverage‘).
• An option to recognise any insurance acquisition cash flows as expenses when these costs are incurred, provided that the coverage period of each contract in the group is no more than a year (rather than adjust the liability for remaining coverage) — see ‘Measurement of remaining coverage‘.
• An entity need only assess whether a group of insurance contracts is onerous if facts and circumstances indicate that the group is onerous (the general model effectively requires an assessment of whether a group of contracts is onerous at each reporting date after the initial recognition of a group) — see ‘Onerous insurance contracts‘.

 

Liability for remaining coverage at initial recognition
Premium received less acquisition costs1		Contractual service margin
		Risk adjustment
		Expected cash flows (adjusted for time value of money)
Premium allocation approach		General model

The accounting model for the premium allocation approach is broadly similar to the accounting model used under IFRS 4 by most non-life or short-duration insurers, sometimes referred to as “an earned premium approach”. There are some differences, for example:

• Presentation in the balance sheet Premium allocation approach
  
  • No separate asset is recognised for deferred acquisition costs. Instead, deferred acquisition costs are subsumed into the insurance liability for remaining coverage.
  • No separate presentation of a premium receivable asset in the balance sheet under IFRS 17 (implicitly included in the insurance liability for remaining coverage)
• Measurement of the liability for remaining coverage includes an explicit risk adjustment for non-financial risk when a group of contracts is onerous
• Measurement of the liability for incurred claims includes an explicit risk adjustment for non-financial risk and is subject to discounting (an entity need not discount the liability for incurred claims if settlement is expected within a year) Premium allocation approach
  

Practical expedients available under the Premium allocation approach

If insurance contracts in the group have a significant financing component, the liability for remaining coverage needs to be discounted, however, this is not required if, at initial recognition, the entity expects that the time between providing each part of the coverage and the due date of the related premium is no more than a year. [IFRS 17:56]

In applying PAA, an entity may choose to recognise any insurance acquisition cash flows as an expense when it incurs those costs, provided that the coverage period at initial recognition is no more than a year. [IFRS 17:59a] Premium allocation approach

The simplifications arising from the PAA do not apply to the measurement of the group’s liability for incurred claims, measured under the General Model. However, there is no need to discount those cash flows if the balance is expected to be paid or received in one year or less from the date the claims are incurred. [IFRS 17: 59b]

Simple example:

The case:

• An insurance company issues a property insurance contract on 1 July 20X1 Premium allocation approach
• The coverage period is 1 year i.e. 1 July 20×1 – 30 June 20×2 Premium allocation approach
• The premium is CU 1,200 per annum Premium allocation approach
• Insurance acquisition costs are paid at the beginning of the insurance and amount to CU 180 Premium allocation approach
• Insurance services are covered evenly over the coverage period (yes indeed the property insurance is the same throughout the year)
• No claims are incurred (quite normal for property insurance covers) Premium allocation approach
• Under IFRS 17 the contract is accounted for as a group of insurance contracts Premium allocation approach

PREMIUM PAID UPFRONT

IFRS 4	01/07/x1	30/09/x1	31/12/x1	31/03/x2	30/06/x2
Insurance premium receivable	0	0	0	0	0
Unearned premium reserve (UPR)	-1,200	-900	-600	-300	0
Deferred acquisition cost (DAC)	180	135	90	45	0
Sum of insurance line items in the statement of financial position	-1,020	-765	-510	-255	0
Revenue (change in UPR)	Premium allocation approach	300	300	300	300
Amortisation DAR	Premium allocation approach	-45	-45	-45	-45

Insurance contract asset(liability) and revenue/amortisation DAR (IFRS 17 55, IFRS 17 B126)

IFRS 17	01/07/x1	30/09/x1	31/12/x1	31/03/x2	30/06/x2
Opening balance	0	-1,020	-765	-510	-255
Premium received on initial recognition	-1,200	Premium allocation approach	Premium allocation approach	Premium allocation approach	Premium allocation approach
Insurance acquisition cost	180	Premium allocation approach	Premium allocation approach	Premium allocation approach	Premium allocation approach
Premiums received in the period	Premium allocation approach	0	0	0	0
Amortisation of insurance acquisition cost	Premium allocation approach	-45	-45	-45	-45
Insurance revenue	Premium allocation approach	300	300	300	300
Closing balance	-1,020	-765	-510	-255	0

PREMIUM PAID AT THE END

IFRS 4	01/07/x1	30/09/x1	31/12/x1	31/03/x2	30/06/x2
Insurance premium receivable	1,200	1,200	1,200	1,200	0
Unearned premium reserve (UPR)	-1,200	-900	-600	-300	0
Deferred acquisition cost (DAC)	180	135	90	45	0
Sum of insurance line items in the statement of financial position	180	435	690	945	0
Revenue (change in UPR)		300	300	300	300
Amortisation DAR		-45	-45	-45	-45

Insurance contract asset(liability) and revenue/amortisation DAR (IFRS 17 55, IFRS 17 B126)

IFRS 17	01/07/x1	30/09/x1	31/12/x1	31/03/x2	30/06/x2
Opening balance	0	180	435	690	945
Premium received on initial recognition
Insurance acquisition cost	180
Premiums received in the period		0	0	0	-1,200
Amortisation of insurance acquisition cost		-45	-45	-45	-45
Insurance revenue		300	300	300	300
Closing balance	180	435	690	945	0

PREMIUM PAID MONTHLY

IFRS 4	01/07/x1	30/09/x1	31/12/x1	31/03/x2	30/06/x2
Insurance premium receivable	1,200	900	600	300	0
Unearned premium reserve (UPR)	-1,200	-900	-600	-300	0
Deferred acquisition cost (DAC)	180	135	90	45	0
Sum of insurance line items in the statement of financial position	180	135	90	45	0
Revenue (change in UPR)		300	300	300	300
Amortisation DAR		-45	-45	-45	-45

Insurance contract asset(liability) and revenue/amortisation DAR (IFRS 17 55, IFRS 17 B126)

IFRS 17	01/07/x1	30/09/x1	31/12/x1	31/03/x2	30/06/x2
Opening balance	0	180	135	90	45
Premium received on initial recognition	0
Insurance acquisition cost	180
Premiums received in the period		-300	-300	-300	-300
Amortisation of insurance acquisition cost		-45	-45	-45	-45
Insurance revenue		300	300	300	300
Closing balance	180	135	90	45	0

Premium allocation approach