IFRS 17 Training Series: Premium Allocation Approach (PAA)

Introduction

• Topic: Premium Allocation Approach (PAA)
• Purpose: Measurement model to calculate liability for remaining coverage (LRC)
• Comparison: Simplified compared to General Measurement Approach (GMA)
• Applicability: Group and Property and Casualty contracts

Eligibility Criteria

• **Automatically Eligible: **Contracts with coverage period ≤ 1 year
• Assessment Required:
  • For contracts > 1 year
  • Measure LRC under PAA and GMA
  • Apply PAA if not materially different

Entity Choice

• Entities can choose to adopt PAA if eligible
• Likely preference for PAA due to simplicity

LRC and LIC Under GMA and PAA

General Measurement Approach (GMA)

• Building Blocks:
  • Future cash flows (best estimate cash flows)
  • Risk adjustment
  • Discounting
• Fulfillment cash flows: Best estimate liability + risk adjustment
• Contractual Service Margin (CSM): Unearned profits

Premium Allocation Approach (PAA)

• Simplified LRC: LRC = Unearned premium
• Key Differences (IFRS 4 vs 17):
  • IFRS 4: Premiums written
  • IFRS 17: Premiums received and earned
• **LIC: **Same in GMA and PAA
  • Present value of future cash flows + risk adjustment
  • No CSM

LRC on Initial Recognition

• Formula: Premiums received - Acquisition cash flows +/− D recognition of DAC asset/liability
• Deferred Acquisition Costs (DAC): Included in liability cash flows under GMA
• Expenses: Entities can elect to expense acquisition cash flows if coverage period ≤ 1 year
• Discounting:
  • Not required for coverage < 1 year
  • Required if > 1 year and contracts have a significant financing component
  • Same methodology as GMA

Risk Adjustment

• LRC: Not required under PAA unless contracts are onerous (use GMA approach)
• LIC: Required for any PAA contracts

Revenue Recognition

• Insurance Revenue: Expected premium receipts allocated to the period (excluding investment components)
  • Premium received and earned
  • Allocation: Uniform/straight-line or follow insurance service expense/claim patterns

Examples

• Seasonal Claims:
  • Hurricane or snowmobile claims (pattern different from uniform allocation)

Investment Components

• Definition: Amounts eligible to be paid whether an insured event occurs or not
• Examples: Cash surrender values, endowments
• Treatment: Reported separately under PAA and GMA

Onerous Contracts

• Recognition: Immediate loss when a group of contracts becomes onerous
• Framework: Identify when a group of PAA contracts becomes onerous by examining factors like loss ratio experience and regulatory/economic changes

Conclusion

• Video Summary: Covered the structure, eligibility, and treatment of PAA in IFRS 17
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