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 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
Expected cash flows (adjusted for time value of money
Premium allocation approach
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
- 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)