liability for remaining coverage, unlike the general model. So, if the discount rate
changes significantly from the initial recognition of the contract this will result in a
difference in the liability for remaining coverage between the premium allocation
approach and the general model. The impact of this difference and its significance
will depend on various factors including how large the discounting impact was
originally, how large a change might reasonably be expected in the currency of the
Insurance contracts (IFRS 17) 4525
liabilities during the coverage period and the length of term of the liabilities, as
longer-tailed contracts are more likely to be affected by discounting than shorter-
tailed contracts.
An entity can elect not to adjust the liability for remaining coverage to reflect the time
value of money (see 9.1 above) in which case the difference between the two
approaches will be driven by the effect of discounting under the general model, which
will be more significant.
9.1.1.C
Uneven revenue recognition patterns
Under the premium allocation approach revenue is based on the passage of time or
expected pattern of release of risk (see 9.3 below). However, under the general model,
the contractual service margin is allocated based on coverage units reflecting the
expected quantity of benefits and duration of each group of insurance contracts
(see 8.7 above).
One example of where differences in revenue recognition between the two
approaches could occur is contracts where the timing of when claims occur is not
evenly spread over the passage of time due to the seasonality of claims. This could
arise if the release of risk is ‘significantly different from the passage of time’. For
example, property insurance contracts exposed to catastrophes tend to have uneven
earnings patterns.
9.1.2
Applying materiality for the premium allocation approach eligibility
assessment
In order to qualify for the premium allocation approach under the first criteria at 9.1
above, the measurement for the liability for remaining coverage should not ‘differ
materially’ from that produced applying the general model. Materiality in this context
should be as defined by IAS 1 (see Chapter 3 at 4.1.5.A). In these circumstances there are
two assessments of materiality:
• Eligibility to be assessed for premium allocation approach must first be assessed
for each group of insurance contracts [IFRS 17.56] and therefore materiality should,
in the first instance, be considered at the group level. If the measurement of the
liability for remaining coverage is not materially different for a group of insurance
contracts measured using the premium allocation approach compared to that
calculated using the general model in a range of scenarios that have a reasonable
possibility of occurring, then the premium allocation approach can be adopted for
that particular group.
• The materiality of the group of insurance contracts to the overall financial
statements should also be considered. For all the groups of insurance contracts
being assessed that do not qualify for the premium allocation approach, if the sum
of the differences between the two approaches across those groups of insurance
contracts is not material when compared to the overall financial statements of the
entity, then the premium allocation approach could be used for all groups of
insurance contracts.
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9.2 Initial
measurement
An entity should measure the liability for remaining coverage on initial recognition 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 chooses
to recognise the payments as an expense (see 9.1 above); and
• plus or minus any amount arising from the derecognition at that date of 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 6 above).
As discussed at 9 above, premiums paid means ‘paid’ rather than receivable or due.
If the entity is not able to or declines to use the policy choice not to adjust the liability
for remaining coverage to reflect the time value of money and the effect of financial risk
(see 9.1 above), the carrying amount of the liability for remaining coverage must be
adjusted to reflect the time value of money and the effect of financial risk using the
discount rate as determined at initial recognition of the group. The discount rate is the
rate at the date of initial recognition of the group determined using the requirements
discussed at 8.3 above.
If the entity is not able to 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 is to increase the liability for remaining coverage
on initial recognition and hence reduce the likelihood of any subsequent onerous contract
loss. There would be an increased profit or loss charge on initial recognition offset by an
increase in profit released over the twelve month contract period.
An entity applying the premium allocation approach should assume that no contracts in
the portfolio are onerous at initial recognition unless facts and circumstances indicate
otherwise. An entity should assess whether contracts that are not onerous at initial
recognition have no significant possibility of becoming onerous subsequently by
assessing the likelihood of changes in applicable facts and circumstances. [IFRS 17.18].
If at any time during the coverage period, including at initial recognition, facts and
circumstances indicate that a group of insurance contracts is onerous, an entity should
calculate the difference between: [IFRS 17.57]
• the carrying amount of the liability for the remaining coverage as determined
above; and
• the fulfilment cash flows (see 8.2 to 8.4 above) that relate to the remaining
coverage of the group.
Any difference arising is recognised as a loss in profit or loss and increases the liability
for remaining coverage. [IFRS 17.58]. In performing the fulfilment cash flows calculation,
above, if an entity does not adjust the liability for incurred claims to reflect the time
value of money and the effect of financial risk, it should not include any such adjustment
in the fulfilment cash flows. [IFRS 17.57].
Insurance contracts (IFRS 17) 4527
The following diagram provides an overview of the premium allocation approach on
initial recognition.
Premiums received
Acquisition cash flows
(plus any additional
onerous contract
liability)
Liability for
remaining coverage
The following example, based on an example accompanying IFRS 17, illustrates the
measurement at initial recognition of a group of insurance contracts measured using the
premium allocation approach.
>
Example 52.36: 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. The insurance contracts have a coverage
period of 10 months that ends on 30 April 2022. The entity’s annual reporting period ends on 31 December
each year and the entity prepares interim financial statements as of 30 June each year.
The entity expects to receive premiums of £1,220 and to pay directly attributable acquisition cash flows of
£20. It is anticipated that no contracts will lapse during the coverage period and that 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. All other
amounts, including the investment component, are ignored for simplicity.
On initial recognition, assuming the premiums were received and the acquisition cash flows paid, the liability
for remaining coverage is £1,200 (i.e. the premium received of £1,220 less the acquisition cash flows of £20).
If neither the premiums nor the acquisition cash flows are received/paid on initial recognition (i.e. they are
receivable/payable at a later date) then the liability for remaining coverage is £0.
9.3
Subsequent measurement – liability for remaining coverage
At the end of each reporting period subsequent to initial recognition, assuming the group
of insurance contracts is not onerous, the carrying amount of the liability for remaining
coverage is the carrying amount at the start of the reporting period: [IFRS 17.55(b)]
• plus the premiums received in the period;
• minus insurance acquisition cash flows: unless the entity chooses to recognise the
payments as an expense (see 9.2 above);
• plus any amounts relating to the amortisation of the insurance acquisition cash
flows recognised as an expense in the reporting period unless the entity chooses
to recognise insurance acquisition cash flows as an expense (see 9.2 above);
• plus any adjustment to the financing component;
• minus the amount recognised as insurance revenue for the coverage period; and
• minus any investment component paid or transferred to the liability for incurred claims.
4528 Chapter 52
This can be illustrated by the following diagram:
Adjustment to
Insurance
financing
revenue
component
recognised
Acquisition
coverage
Amortisation
period
Premiums
cash flows
of acquisition
received
paid
cash flows
Investment
component
paid/transferred
Liability for
remaining
Liability for
coverage – start
remaining
of reporting
coverage – end
period
of reporting
period
If a group of insurance contracts was onerous at initial recognition, then an entity would
continue to compare the carrying amount of the liability for remaining coverage as
calculated above with the fulfilment cash flows and recognise any further deficits or
surpluses (to the extent that the fulfilment cash flows still exceed the liability for
remaining coverage on a cumulative basis) in profit or loss.
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 for services
provided. An entity should allocate the expected premium receipts to each period of
coverage: [IFRS 17.B126]
• on the basis of the passage of time; but
• if the expected pattern of release of risk during the coverage period differs
significantly from the passage of time (which might be the case for example if claims
were skewed towards a particular time of year such as the ‘hurricane season’), on the
basis of the expected timing of incurred insurance service expenses.
The liability for remaining coverage may be an asset if premiums are received after the
recognition of revenue as revenue is recognised independent of the receipt of cash but
is determined by the provision of coverage services.
An entity should change the basis of allocation between the two methods (passage of time
and incurred insurance service expenses) as necessary if facts and circumstances change.
[IFRS 17.B127]. This change results from new information and accordingly is not a correction
of an error and will be accounted for prospectively as a change in accounting estimate.
Judgement will be required in interpreting ‘differs significantly from the passage of time’.
The following example illustrates the subsequent measurement of a group of insurance
contracts using the premium allocation approach assuming the same fact pattern as
Example 52.36 above.
Insurance contracts (IFRS 17) 4529
Example 52.37: Subsequent measurement of a group of insurance contracts using
the premium allocation approach
Assuming the same fact pattern as Example 52.36 above.
On initial recognition, the entity receives all the premiums and pays all the acquisition cash flows. The entity
expects to be released from risk evenly over the 10m 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
$732 (i.e. 60% of $1,220). The insurance acquisition cash flows of $20 are recognised as insurance service
expense (as per Example 52.36 above, the entity has chosen to recognise the acquisition cash flows as
incurred and not over the passage of time).
As at 31 December 2021, the liability for remaining coverage is $488 (i.e. $1,220 – $732 or 40% of $1,220).
Note that, alternatively, if premiums and acquisition cash flows were not received/paid until 1 January 2022,
the liability for remaining coverage would be an asset of $732 at 31 December 2021.
For the six month reporting period ending on 30 June 2022, the entity recognises the remaining $488 as
insurance revenue and there is no liability for remaining coverage as at 30 June 2022.
9.4
Subsequent measurement – liability for incurred claims
The liability for incurred claims for a group of insurance contracts subject to the
premium allocation approach (which should usually be nil on initial recognition) is
measured in the same way as the liability for incurred claims using the general model
(i.e. a discounted estimate of future cash flows with a risk adjustment for non-financial
risk). See 8.6.3 above.
&nbs
p; When the entire finance income or expense is included in profit or loss, incurred claims
are discounted at current rates (i.e. the rate at the reporting date). When finance income
or expense is disaggregated between profit or loss and other comprehensive income
(see 15.3.2 below) the amount of finance income or expense included in profit or loss is
determined using the discount rate at the date of the incurred claim. See 8.3 above.
However, when applying the premium allocation method to the liability for
remaining coverage, an entity is, for the liability for incurred claims, not required to
adjust future cash flows for the time value of money and the effect of financial risk if
those cash flows (for that group of insurance contracts) are expected to be paid or
received in one year or less from the date the claims are incurred. [IFRS 17.59(b)]. This
is a separate election from the election 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 at initial recognition (see 9.2 above). It is possible that a group of
insurance contracts would be eligible to avoid adjusting the liability for remaining
coverage for time value of money (because the coverage period and the premium due
date are within one year) but have to discount the liability for incurred claims
(because the claims are not expected to settle within one year or less from the date
in which they are incurred). This would probably be the case for liability claims such
as disability, employer’s liability or product liability.
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Example 52.38: Subsequent measurement of the liability for incurred claims
using the premium allocation approach
Assuming the same fact pattern as Example 52.36 above.
For the six month reporting period ending on 31 December 2021, there were claims incurred of £636 including
a risk adjustment for non-financial risk related to those claims of £36. None of the claims have been paid at the
reporting date. The claims will be paid within one year after the claims are incurred and therefore the entity
chooses not to adjust the liability for incurred claims for the time value of money and the effect of financial risk.
At 31 December 2021 the liability for incurred claims is £636 which is also the amount for incurred claims
recorded in profit or loss as insurance service expenses.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 895