hello and welcome to the IFRS 17 training Series in this video we will cover the premium allocation approach or paa the premium allocation approach is a measurement model to calculate the liability for remaining coverage or lrc and it's a simplified approach compared to the GMA or general measurement approach it's applicable to many group and Property and Casualty contracts to be eligible for the PA there are some requirements a group of insurance contracts is eligible to use the PA if the coverage period of each contract in the group is one year or less or the lrc liability for remaining coverage calculated under the paa is not materially different than the LIC sorry lrc calculated under the GMA so if you have a contract that is 12 months or less it will automatically qualify for the paa if their contracts are longer than 12 months then you have to do an assessment you need to measure the lrc under the paa and under the GMA and if they are not materially different then you can apply the paa to that group of contracts now our entity has a choice to adopt the paaf eligible they are not required to do so though but however most entities would likely choose to use the paa as it is a much simpler way to Value the lrc under IFRS 17. so what does the lrc and LIC look like under the GMA and paa under the GMA we have our building blocks we have our future cash flows which are also known as the best estimate cash flows we have a risk adjustment and we have our discounting so taken together our best estimate liability and our risk adjustment are our fulfillment cash flows and we also have our contractual service margin or our unearned profits or under the paa it's a simplified version of the lrc and the paa under the paa the lrc is equal to our unearned premium the key difference between RFS 4 and 17 is the definition of those premiums under ifrs4 it was premiums written and under eye for a 17 its premiums received and earned or unearned under the LIC liability for incurred claims the two approaches are the same so it's the same under the GMA and paa it's our present value of our future cash flows and our risk adjustment with no CSM so the liability for remaining coverage is very similar to the ifrs-4 unearned premium approach the lrc on initial recognition is equal to any premiums received at initial recognition minus any acquisition cash flows at initial recognition if there are any plus or minus any D recognition of any DAC asset or DAC liability where Doc is deferred acquisition costs for insurance acquisition costs those cash flows under the GMA are deferred and included in the liability cash flows under the paa you can also use this approach by default however an entity can also elect to expense acquisition cash flows as incurred if your coverage period is one year or less and this would simplify your accounting procedures because you no longer have to calculate a DAC asset for those Insurance acquisition cash flows in terms of discounting the lrc under the PA is not always adjusted for discounting discounting is not required when coverage is provided less than one year from One Premium is received but discounting is required when coverage is provided more than one year from One Premium is received and the contracts have a significant financing component as per IFRS 15 Revenue recognition so if applicable PA discounting methodology is the same as GMA and we have a separate video on discounting that you can check out to learn more next we'll talk about the risk adjustment and the risk adjustment is not required for the lrc under the paa unless the group of contracts is onerous if the group of contracts is onerous then the GMA approach would apply and you'd have to calculate a risk adjustment the risk adjustment is required though for the LIC under any Pia contracts next we'll talk about Revenue recognition under the paa your insurance revenue is equal to your expected premium receipts allocated to the period excluding any investment components so it's equal to your premium received in the period and earned the allocation is either uniform or straight-line passage of time or it would follow the pattern of your insurance service expense or your claim patterns if it's significantly different than uniform so for example seasonal claims such as hurricane claims or snowmobile claims that typically snowmobiles are only used in the winter so you'd only see snowmobile claims in the winter finally we'll talk about investment components and we have a separate video that dives into investment components but as a reminder an investment component is any amount that is eligible to be paid whether an insured event occurs or not so for example for longer term contracts cash surrender values and endowments are examples of investment components now investment component experience under the paa has to be reported separately just as with the GMA finally we'll talk about onerous contracts so when a group of contracts becomes onerous a loss is recognized immediately and we need a framework required to identify when a group of paa contracts becomes onerous so some potential things to examine would be the loss ratio experience if for example if expected costs increase that would increase your loss ratio and may drive the group of contracts to be in an unprofitable position or if there are regulatory or economic changes those could adversely impact the claims or expenses of the group of policies and that could push the group into onerous territory so that concludes our video on the premium allocation approach thank you for watching