policyholders with a residual interest in the mutual entity bear the pooled risk
collectively in their capacity as owners.
Payments to policyholders form part of fulfilment cash flows regardless of whether
those payments are expected to be made to current or future policyholders.
[IFRS 17.BC265]. Payments to policyholders with a residual interest in a mutual entity vary
depending on the returns on underlying items, the net asset of the mutual entity. These
cash flows (i.e. the payments that vary with the underlying items) are within the
boundary of an insurance contract. [IFRS 17.BB65(c)]. Although policyholders with a
residual interest in the entity bear the pooled risk collectively, the mutual, as a separate
entity has accepted risk from each individual policyholder and therefore the risk
adjustment for non-financial risk for these contracts reflects the compensation the
mutual entity requires for bearing the uncertainty from non-financial risk in those
contracts. However, because the net cash flows of the mutual entity are returned to
policyholders, applying IFRS 17 to contracts with policyholders with a residual interest
in the mutual entity will result in no contractual service margin for those contracts.23
Insurance contracts (IFRS 17) 4519
Mutual entities may also issue insurance contracts that do not provide the policyholder
with a residual interest in the mutual entity. Consequently, groups of such contracts are
expected to have a contractual service margin. Determining whether a contract
provides the policyholder with a residual interest in the mutual entity requires
consideration of all substantive rights and obligations.
The IASB also suggest that to provide useful information about its financial position a
mutual can distinguish between:
• liabilities attributable to policyholders in their capacity as policyholders; and
• liabilities attributable to policyholders with the most residual interest in the entity.
The statement of financial performance could include a line item ‘income or expenses
attributable to policyholders in their capacity as policyholders before determination of
the amounts attributable to policyholders with the most residual interest in the entity’.24
8.11 Other
matters
8.11.1
Impairment of insurance receivables
IFRS 17 does not refer to impairment of insurance receivables (e.g. amounts due from
policyholders or agents in respect of insurance premiums).
A premium receivable (including premium adjustments and instalment premiums) is a
right arising from an insurance (or reinsurance) contract. Rights and obligations under
contracts within the scope of IFRS 17 are excluded from the scope of IFRS 9 (see 2.3
above). As a premium receivable is a cash flow it is measured on an expected present
value basis (see 8.2 above) which should include an assessment of credit risk. This cash
flow is remeasured at each reporting date. Receivables from insurance contracts are not
required to be disclosed separately on the statement of financial position but are
subsumed within the overall insurance contract balances (see 14 below).
Receivables not arising from insurance contracts (such as those arising from a
contractual relationship with an agent) would be within the scope of IFRS 9. When an
insurer uses an agent, judgement may be required to determine whether insurance
receivables payable by an agent on behalf of a policyholder are within the scope of
IFRS 17 or IFRS 9.
8.11.2 Policyholder
loans
Some insurance contracts permit the policyholder to obtain a loan from the insurer with the
insurance contract acting as collateral for the loan. Under IFRS 4 policyholder loans may
have been separated from insurance contract balances and shown as separate assets. IFRS 17
regards a policyholder loan as an example of an investment component with interrelated
cash flows which is not separated from the host insurance contract. [IFRS 17.BC114].
Consequently, a policyholder loan is included within the overall insurance contract balance
and is part of the fulfilment cash flows (and is not within the scope of IFRS 9).
There may be situations when an insurance policy is collateral for a stand-alone
loan, not stemming from the contractual terms of an insurance contract and not
highly interrelated with an insurance contract. Such a loan would be within the
scope of IFRS 9.
4520 Chapter 52
9
MEASUREMENT – PREMIUM ALLOCATION APPROACH
The premium allocation approach is a simplified form of measurement of insurance
contracts. Use of the premium allocation approach is optional for each group of
insurance contracts that meets the eligibility criteria. The premium allocation approach
is intended to produce an accounting outcome similar to that which resulted from the
unearned premium approach used by many non-life or short-duration insurers under
previous local GAAP and, hence, continued under IFRS 4. The Board considers that it
is similar to the customer consideration approach in IFRS 15. However, as shown at 9.1
below, the criteria required for use of the premium allocation approach means that not
all contracts regulated as ‘non-life’ or ‘short-duration’ by local regulators will qualify.
The main advantage of the simplified method, in accounting terms, is that the premium
allocation approach does not require separate identification of the components (i.e. the
building blocks) of the general model until a claim is incurred. Only a total amount for a
liability for remaining coverage on initial recognition is determined, rather than a
separate calculation of the components of the fulfilment cash flows performed with the
contractual service margin as a balancing item which eliminates any expected profit.
Therefore, using the premium allocation approach results in a simpler accounting
method compared to the general model. Further, as discussed at 9.2 below, an entity
also has the option not to adjust liabilities for incurred claims for the effect of time value
of money and financial risk in certain circumstances. Consequently, the premium
allocation approach also produces results which are generally more similar to current
accounting practices accounting applied under IFRS 4 than the general model, and
therefore likely to be more readily understood.
The premium allocation approach can also be used for reinsurance contracts held.
However, the ability to use the premium allocation approach for reinsurance contracts
held must be assessed separately from the use of the premium allocation approach for
the related underlying insurance contracts covered by reinsurance. See 10.7 below for
discussion of the application of the premium allocation approach to reinsurance
contracts held.
Although 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
there are some important differences as follows:
• the liability for remaining coverage is measured using premiums received and
insurance acquisition cash flows paid. The words ‘received’ and ‘paid’ are to be
interpreted literally, rather than amounts due (see below). U
nder local GAAP (and
hence IFRS 4) the unearned premium provision would have often been set up based
on premiums receivable, with a separate asset recorded for the premiums receivable;
Insurance contracts (IFRS 17) 4521
• no separate asset is recognised for deferred acquisition costs. Instead, deferred
acquisition costs are subsumed into the insurance liability for remaining coverage;
• most non-life or short-duration insurers would not usually have discounted their
insurance liabilities under local GAAP (a practice permitted to continue under
IFRS 4); and
• the fulfilment cash flows model required for incurred claims, which is the same as
the general model except for one simplification, is likely to be different than the
incurred claim model used under local GAAP (and therefore IFRS 4).
A comparison of the general model with the premium allocation approach on initial
recognition is shown below.
Premium allocation
General model
approach
Contractual service margin
Risk adjustment
Premium received
(less allocation costs)
Discounted estimate of
fulfilment cash flows
In February 2018, the TRG members agreed with the IASB staff view that the words
‘premiums, if any, received’ in paragraphs 55(a) and 55(b)(i) of IFRS 17 means premiums
actually received at the reporting date. It does not include premiums due or premiums
expected. However, the TRG members noted that applying these requirements reflects
a significant change from existing practice and this change results in implementation
complexities and costs.25 Subsequently, the IASB staff included this matter in an
implementation challenges outreach report issued in May 2018 which was also provided
to the IASB within the papers for the May 2018 IASB Board meeting. Although not
explicitly addressed in the IASB staff interpretation, based on the scenarios illustrated
in the outreach report, it appears that acquisition cash flows also mean ‘cash paid’ rather
than cash payable in this context.26
4522 Chapter 52
9.1
Criteria for use of the premium allocation approach
The premium allocation approach is permitted if, and only if, at the inception of the
group of contracts: [IFRS 17.53]
• the entity reasonably expects that such simplification would produce a
measurement of the liability for remaining coverage for the group that would not
differ materially from the one that would be produced applying the requirements
for the general model discussed at 8 above (i.e. the fulfilment cash flows related to
future service plus the contractual service margin); or
• the coverage period of each contract in the group (including coverage arising from
all premiums within the contract boundary determined at that date applying the
requirements discussed at 8.1. above) is one year or less.
The second criterion means that all contracts with a one year coverage period or less
should qualify for the premium allocation approach regardless as to whether the first
criterion is met. Therefore, for insurance contracts with a coverage period greater than
one year (e.g. long term construction insurance contracts or extended warranty-type
contracts) entities will need to meet the first criterion in order to be eligible for the
premium allocation approach.
IFRS 17 states that the first criterion is not met if, at the inception of the group of
contracts, an entity expects significant variability in the fulfilment cash flows that would
affect the measurement of the liability for the remaining coverage during the period
before a claim is incurred. Variability in the fulfilment cash flows increases with, for
example: [IFRS 17.54]
• the extent of future cash flows related to any derivatives embedded in the
contracts; and
• the length of the coverage period of the group of contracts.
A discussion identifying the main sources of variability between the premium allocation
approach and the general model is at 9.1.1 below. A discussion of the meaning of ‘differ
materially in these circumstances’ is at 9.1.2 below.
Once an entity decides to use the premium allocation approach for a group of insurance
contracts, the following choices are available separately in certain circumstances:
• a choice whether or not to recognise acquisition cash flows as an expense on initial
recognition or to include those cash flows within the liability for remaining
coverage (and hence amortise those cash flows over the coverage period). The
ability to recognise acquisition cash flows as an expense on initial recognition is
available provided that the coverage period of each contract in the group on initial
recognition is no more than one year. Otherwise acquisition cash flows must be
included within the liability for remaining coverage; [IFRS 17.59(a)] and
• a choice whether or not to adjust the liability for remaining coverage to reflect the
time value of money and the effect of financial risk. An entity is not required to
adjust 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 one year. Otherwise, the liability for remaining coverage must be
Insurance contracts (IFRS 17) 4523
adjusted to reflect the time value of money and the effect of financial risk using the
discount rates as determined on initial recognition if the insurance contracts in the
group have a significant financing component. [IFRS 17.56].
These choices can be shown graphically as follows:
Group of insurance contracts eligible to use PAA?
Yes
No
Apply PAA
or
Apply general
(optional)
model
Expense insurance acquisition cash
flows on initial recognition ?
If coverage
Yes
Yes or No
period no more than
one year
Expense on
Amortise over
initial
coverage
recognition
period
Adjust the liability for remaining coverage for the
time value of money and effect of financial risk ?
If time
Yes
between coverage
Yes or No
and premium due date
within one
year
No
Adjustment
adjustment
Measure liability for remaining coverage
4524 Chapter 52
9.1.1
Main sources of difference between the premium allocation approach
and the general approach
The first criterion for use of the premium allocation approach discussed at 9.1 above
involves a comparison of the liability for remaining coverage under the general model and
the premium allocation approach over the expected period of the liability for remaining
coverage. This assessment is made at inception and is not reassessed subsequently.
Under all situations the liability for incu
rred claims is the same between the premium
allocation approach and general model. This means that after the coverage period has
expired there will be no difference between the two approaches. However, a number
of situations exist under which the premium allocation approach and the general model
could produce different measurements for the liability for remaining coverage during
the coverage period, and therefore could impact the eligibility of the premium
allocation approach. These should be considered when designing the approach for
assessing the applicability of the premium allocation approach. Three examples of
potential sources of differences are as follows:
• changing expectations of profitability for the remaining coverage – see 9.1.1.A below;
• changing interest rates – see 9.1.1.B below; and
• uneven revenue recognition – see 9.1.1.C below.
9.1.1.A
Changing expectations of profitability for the remaining coverage
When the expectation of the remaining profitability changes during the coverage
period of a group of insurance contacts, so that it is still profitable, the results can
differ under the premium allocation approach and general model. In this situation,
the premium allocation approach will not recognise this improvement or
deterioration in profitability in an explicit way until the exposure is earned, whereas
the general model will recognise a portion of this change in expectations now through
the unwinding of the contractual service margin even though the exposure has not
yet been earned.
The significance of this difference will vary depending on how likely it is that the
expected profitability of the remaining coverage might change and how much it may
vary by. However, if the change in expectation of future profitability is to such an extent
that the contract becomes onerous under the general model, then both approaches will
give the same results.
9.1.1.B
Changing interest rates
Under the premium allocation approach an amount can be included for accretion of
interest if necessary but this is based on the interest rate at the date of initial
recognition of the contract (see 8.4 above). As a result, in these situations, the
premium allocation approach never considers the current interest rates for the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 894
