Measurement of remaining coverage

An entity measures the liability for remaining coverage on initial recognition of a group of insurance contracts eligible for the premium allocation approach (PAA) that are not onerous, as follows (IFRS 17 55]:

  • The premium, if any, received at initial recognition
    Minus
  • Any insurance acquisition cash flows at that date, unless the entity is eligible and chooses to recognise the payments as an expense (coverage period of a year or less)
    Plus or minus
  • Any amount arising from the derecognition at that date, the asset or liability recognised for insurance acquisition cash flows that the entity pays or receives before the group of insurance contracts is recognised (see ‘Initial recognition of insurance contracts’)

For contracts that are onerous, the liability for remaining coverage is determined by the fulfilment cash flows, as described in ‘Onerous insurance contracts’. For these contracts, a loss component is established as the excess of the fulfilment cash flows over the amount calculated above.

Example – Measurement at initial recognition of a group of insurance contracts using the premium allocation approach

An entity issues a group of insurance contracts on 1 July 2021 that have a coverage period of 10 months ending 30 April 2022. The annual reporting period ends 31 December each year and the entity prepares interim financial statements as of 30 June.

On initial recognition, the entity receives a premiums of CU1,220 and pays directly attributable acquisition cash flows of CU20. No contracts are expected to lapse during the coverage period and the facts and circumstances do not indicate that the group of contracts is onerous.

The group of insurance contracts qualifies for the premium allocation approach. As the time between providing each part of the coverage and the related premium due is no more than a year, 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). Furthermore, the entity chooses to recognise the insurance cash flows as an expense when it incurs the relevant costs. For simplicity, all other amounts, including the investment component, are disregarded.

On initial recognition, the liability for remaining coverage is CU1,220 (i.e., the premium received of CU1,220 on initial recognition).

At the end of each subsequent reporting period, the carrying amount of the liability is the carrying amount at the start of the reporting period [IFRS 17 55]:

  • Plus the premiums received in the period
  • Minus insurance acquisition cash flows, unless the entity is eligible and chooses to recognise the payments as an expense
  • Plus any amounts relating to amortising insurance acquisition cash flows recognised as an expense in the reporting period, unless the entity is eligible and chooses to recognise the payments as an expense
  • Plus any adjustment to a financing component, if any (see below)
  • Minus the amount recognised as insurance revenue for coverage provided in that period
  • Minus any investment component paid or transferred to the liability for incurred claims

(Amounts in CU’000)

Remaining coverage liability

Opening balance

161,938

Insurance revenue

-9,856

Insurance service expenses:

1,259

Acquisition expenses

1,259

Investment components

-6,465

Insurance service result

-15,062

Insurance finance expenses

8,393

Total changes in the statement of comprehensive income

-6,669

Cash flows:

Premiums received

33,570

Insurance acquisition cash flows paid Measurement of remaining coverage

-401

Currency exchange differences Measurement of remaining coverage

Closing balance Measurement of remaining coverage

188,438

If insurance contracts in the group have a significant financing component, an entity must adjust the carrying amount of the liability for remaining coverage to reflect the time value of money and the effect of financial risk using discount rates that reflect the characteristics of the cash flows of the group of insurance contracts at initial recognition. The entity is not required to adjust the carrying amount of the liability for remaining coverage to reflect the time value of money and the effect of financial risk if, at initial recognition, the entity expects that the time between providing each part of the coverage and the related premium due date is no more than a year [IFRS 17 56]. Measurement of remaining coverage

Example – Measurement subsequent to initial recognition of a group of insurance contracts using the premium allocation approach

Assuming the same fact pattern as the example above, as follows: Measurement of remaining coverage

An entity issues a group of insurance contracts on 1 July 2021 that have a coverage period of 10 months ending 30 April 2022. The annual reporting period ends 31 December each year and the entity prepares interim financial statements as of 30 June.

On initial recognition, the entity receives a premiums of CU1,220. Measurement of remaining coverage

On initial recognition, the entity receives the premium and pays all acquisition cash flows. The entity expects to be released from risk evenly over the 10-month contract period. At the reporting date (31 December 2021), the contract is still not expected to be onerous.

For the six-month reporting period ending on 31 December 2021, the entity recognises insurance revenue of CU732 (i.e., 60% of CU1,220). The insurance acquisition expenses of CU20 are recognised as insurance service expense (the entity has chosen to recognise the costs as incurred and not over the passage of time). Measurement of remaining coverage

At 31 December 2021, the liability for remaining coverage is CU488 (i.e., CU 1,220 — CU 732 or 40% of CU1.220). Measurement of remaining coverage

For the six-month reporting period ending 30 June 2022, the entity recognises the remaining CU488 as insurance revenue and there is no liability for remaining coverage at 30 June 2022.

If at any time during the coverage period, facts and circumstances indicate that a group of insurance contracts is onerous, an entity must calculate the difference between [IFRS 17 57]:

  • The carrying amount of the liability for remaining coverage applying the premium allocation approach
    And Measurement of remaining coverage
  • The fulfilment cash flows that relate to remaining coverage of the group applying the general model. However, if the entity does not adjust the liability for incurred claims for the time value of money and the effect of financial risk in applying the premium allocation approach, it shall not include such adjustments in the fulfilment cash flows

To the extent that the fulfilment cash flows described above exceed the carrying amount of the liability for remaining coverage by applying the premium allocation approach, the entity must recognise a loss in profit or loss and increase the liability for remaining coverage [IFRS 17 58]. Measurement of remaining coverage

Insurance revenue for the period is the amount of expected premium receipts (excluding any investment component and adjusted to reflect the time value of money and the effect of financial risk, if applicable) allocated to the period. The entity should allocate the expected premium receipts to each period of coverage on the basis of the passage of time. However, if the expected pattern of release of risk during the coverage period differs significantly from the passage of time, then the expected premium receipts must be allocated to each period of coverage on the basis of the expected timing of incurred insurance service expenses [IFRS 17 B126]. An entity should change the basis for allocating revenue between the passage of time and expected timing of incurred insurance service expense (and vice versa) if facts and circumstances change [IFRS 17 B127].

In applying the premium allocation approach, an entity may choose to recognise any insurance acquisition cash flows as expenses when it incurs those costs, provided that the coverage period of each contract in the group at initial recognition is no more than one year [IFRS 17 50]. If the entity is not able or chooses not to use the policy choice to recognise insurance acquisition cash flows as an expense, then the acquisition cash flows are included within the liability for remaining coverage. The effect of recognising insurance acquisition cash flows as an expense on initial recognition of group of insurance contracts is to increase the liability for remaining coverage on initial recognition and reduce the likelihood of any subsequent onerous contract loss. There would be an increased charge to profit or loss on initial recognition, due to expensing acquisition cash flows, offset by an increase in profit released over the coverage period.

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