What is it?
The Premium Allocation Approach is a simplification of the General Measurement Model. The model is following the principles of the GMM but allows a more basic measurement approach. It is also more similar to the current methods used in IFRS4 by the industry, so the change is not so great.
When is it used?
The PAA can be used for any contract that is less than 1 year in duration. This means it is very relevant for general insurers which typically sell such shorter policies. However, it can be used for any insurance contract covered by IFRS 17 but the insurance company must show that in applying the PAA the result is materially the same as under the GMM.
How does it work?
The PAA does not use the CSM concept. The liability for coverage is instead based on the premium received. The insurer is not required to create a view of all future cash flows instead the initial insurance asset on initial recognition is simply any premium received in the period. Note this is a not a view of all future premiums under the contract but only the premium received in the period. This asset can be reduced by any acquisition costs. The liability for coverage is then the opposite sign of the premium, less any acquisition costs and referred to as the Liability for Remaining Coverage (“LRC”).
The LRC is released to the P&L either over time or in some cases can be weighted to risk patterns if appropriate.
The insurer is not required to project and recognise all future expected claims. Claims are only recognised when incurred. At the point they are measured the GMM principles are used. Discounting is only required if material.
The grouping principles defined in the GMM are applied in the PAA model also.
The assumption is the contracts measured under the PAA are not onerous. The insurer is not required to explicitly test this by projecting all future expected claims unless facts and circumstances indicate the groups is onerous. In that case the GMM principles apply and a loss must be recognised in the P&L. From that point on the groups must be measured using the GMM.