Premium Allocation Approach

5/30/22, 10:29 AM Premium Allocation Approach – Annual Reporting
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Premium allocation approach

15/02/2020
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 (look right here), at the inception
of the group:
Premium
allocation approach
[IFRS 17:53]
a. the entity reasonably expects that this will be a reasonable approximation of the General
Model, or
b. the coverage period of each contract in the group is one year or less
Where, at the inception of the group, an entity expects significant variances in the fulfilment
cash flows (FCF) during the period before a claim is incurred, such contracts are not eligible to
apply the PAA. [IFRS 17:54]
Using the PAA, the liability for remaining coverage shall be initially recognised as the premiums,
if any, received at initial recognition, minus any insurance acquisition cash flows. Subsequently
the carrying amount of the liability is the carrying amount at the start of the reporting period
plus the premiums received in the period, minus insurance acquisition cash flows, plus
amortisation of acquisition cash flows, minus the amount recognised as insurance revenue for
coverage provided in that period, and minus any investment component paid or transferred to
the liability for incurred claims. [IFRS 17:55]
https://annualreporting.info/premium-allocation-approach/#:~:text=The premium allocation approach is a simplified form,the inception of the group%3… 1/13
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‘.
Something else - Market consistent measurement of options and guarantees
Liability for remaining coverage at initial recognition
Premium received less acquisition Contractual service margin 

costs1
Risk adjustment
Expected cash flows (adjusted for

time value of money)
Premium allocation approach General model
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 Premium allocation approach
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) Premium allocation approach
Practical expedients available under the Premium allocation approach
If insurance contracts in the group have a significant financing component, the liability for
remaining coverage needs to be discounted, however, this is not required if, at initial
recognition, the entity expects that the time between providing each part of the coverage and the
due date of the related premium is no more than a year. [IFRS 17:56]
In applying PAA, an entity may choose to recognise any insurance acquisition cash flows as an
expense when it incurs those costs, provided that the coverage period at initial recognition is no
more than a year. [IFRS 17:59a] Premium allocation approach
Something else - Insurances risk adjustment for non-financial risks

The simplifications arising from the PAA do not apply to the measurement of the group’s
liability for incurred claims, measured under the General Model. However, there is no need to
discount those cash flows if the balance is expected to be paid or received in one year or less
from the date the claims are incurred. [IFRS 17: 59b]
Simple example:
The case:
An insurance company issues a property insurance contract on 1 July 20X1 Pre
mium allocation approach

The coverage period is 1 year i.e. 1 July 20×1 – 30 June 20×2 Premium allocation
approach
The premium is CU 1,200 per annum Premium allocation approach
Insurance acquisition costs are paid at the beginning of the insurance and amount to CU
180 Premium allocation approach
Insurance services are covered evenly over the coverage period (yes indeed the property
insurance is the same throughout the year)
No claims are incurred (quite normal for property insurance covers) Premium allocation
approach
Under IFRS 17 the contract is accounted for as a group of insurance contracts Premium
allocation approach
PREMIUM PAID UPFRONT
IFRS 4 01/07/x1 30/09/x1 31/12/x1 31/03/x2 30/06/x2
Insurance premium
receivable
Unearned premium -1,200 -900 -600 -300

reserve (UPR)

Deferred acquisition cost 180 135 90 45
(DAC)
Sum of insurance line -1,020 -765 -510 -255

items in the statement of
financial position
Revenue (change in Premium 300 300 300 300

UPR) allocation
approach
Amortisation DAR Premium -45 -45 -45 -45

allocation
approach
Insurance contract asset(liability) and revenue/amortisation DAR (IFRS 17 55, IFRS 17 B126)
IFRS 17 01/07/x1 30/09/x1 31/12/x1 31/03/x2 30/06/x2
Opening balance -1,020 -765 -510 -255
Premium received on -1,200 Premium Premium Premium Premium

initial recognition allocation allocation allocation allocation
approach approach approach approach
Insurance acquisition 180 Premium Premium Premium Premium

cost allocation allocation allocation allocation
approach approach approach approach
Premiums received in the Premium

period allocation
approach
Amortisation of Premium -45 -45 -45 -45

insurance acquisition allocation
cost approach

Insurance revenue Premium 300 300 300 300
allocation
approach
Closing balance -1,020 -765 -510 -255
Something else - Direct participating contracts
PREMIUM PAID AT THE END
IFRS 4 01/07/x1 30/09/x1 31/12/x1 31/03/x2 30/06/x2
Insurance premium 1,200 1,200 1,200 1,200

receivable

reserve (UPR)
Deferred acquisition cost 180 135 90 45

(DAC)
Sum of insurance line 180 435 690 945

financial position
Revenue (change in 300 300 300 300

UPR)
Amortisation DAR -45 -45 -45 -45

IFRS 17 01/07/x1 30/09/x1 31/12/x1 31/03/x2 30/06/x2
Opening balance 180 435 690 945
Premium received on
initial recognition
Insurance acquisition 180

cost
Premiums received in the -1,200

period
Amortisation of -45 -45 -45 -45

insurance acquisition
cost
Insurance revenue 300 300 300 300
Closing balance 180 435 690 945
PREMIUM PAID MONTHLY
IFRS 4 01/07/x1 30/09/x1 31/12/x1 31/03/x2 30/06/x2
Insurance premium 1,200 900 600 300

receivable

reserve (UPR)
Deferred acquisition cost 180 135 90 45 

(DAC)
Sum of insurance line 180 135 90 45

financial position
Revenue (change in 300 300 300 300

UPR)
Amortisation DAR -45 -45 -45 -45
IFRS 17 01/07/x1 30/09/x1 31/12/x1 31/03/x2 30/06/x2
Opening balance 180 135 90 45
Premium received on
initial recognition
Insurance acquisition 180

cost
Premiums received in the -300 -300 -300 -300

period
Amortisation of -45 -45 -45 -45

insurance acquisition
cost
Insurance revenue 300 300 300 300

Closing balance 180 135 90 45
Premium allocation approach
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information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.
Something else - Fundamental Principles of Value Creation
 IFRS 17 Insurance Contracts

 Onerous insurance contracts
 Eligibility of premium allocation approach
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5/30/22, 10:29 AM Premium Allocation Approach – Annual Reporting

The premium allocation approach is a simplified form of measuring insurance contracts in

Something else - Market consistent measurement of options and guarantees

Liability for remaining coverage at initial recognition

Premium received less acquisition Contractual service margin 

Expected cash flows (adjusted for

Premium allocation approach General model

Presentation in the balance sheet Premium allocation approach

No separate asset is recognised for deferred acquisition costs. Instead, deferred

Practical expedients available under the Premium allocation approach

Something else - Insurances risk adjustment for non-financial risks

An insurance company issues a property insurance contract on 1 July 20X1 Pre

mium allocation approach

PREMIUM PAID UPFRONT

IFRS 4 01/07/x1 30/09/x1 31/12/x1 31/03/x2 30/06/x2

Unearned premium -1,200 -900 -600 -300

Sum of insurance line -1,020 -765 -510 -255

Revenue (change in Premium 300 300 300 300

Amortisation DAR Premium -45 -45 -45 -45

IFRS 17 01/07/x1 30/09/x1 31/12/x1 31/03/x2 30/06/x2

Opening balance -1,020 -765 -510 -255

Premium received on -1,200 Premium Premium Premium Premium

Insurance acquisition 180 Premium Premium Premium Premium

Premiums received in the Premium

Amortisation of Premium -45 -45 -45 -45

Closing balance -1,020 -765 -510 -255

Something else - Direct participating contracts

PREMIUM PAID AT THE END

IFRS 4 01/07/x1 30/09/x1 31/12/x1 31/03/x2 30/06/x2

Insurance premium 1,200 1,200 1,200 1,200

Unearned premium -1,200 -900 -600 -300

Deferred acquisition cost 180 135 90 45

Sum of insurance line 180 435 690 945

Revenue (change in 300 300 300 300

Amortisation DAR -45 -45 -45 -45

Opening balance 180 435 690 945

Insurance acquisition 180

Premiums received in the -1,200

Amortisation of -45 -45 -45 -45

Insurance revenue 300 300 300 300

Closing balance 180 435 690 945

PREMIUM PAID MONTHLY

IFRS 4 01/07/x1 30/09/x1 31/12/x1 31/03/x2 30/06/x2

Insurance premium 1,200 900 600 300

Unearned premium -1,200 -900 -600 -300

Deferred acquisition cost 180 135 90 45 

Sum of insurance line 180 135 90 45

Revenue (change in 300 300 300 300

Amortisation DAR -45 -45 -45 -45

IFRS 17 01/07/x1 30/09/x1 31/12/x1 31/03/x2 30/06/x2

Opening balance 180 135 90 45

Insurance acquisition 180

Premiums received in the -300 -300 -300 -300

Amortisation of -45 -45 -45 -45

Insurance revenue 300 300 300 300

Premium allocation approach

Something else - Fundamental Principles of Value Creation