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Not all groups of insurance contracts will be eligible for PAA.

• If the coverage period of all contracts are a year or less then you can automatically use PAA.

• For longer contracts you need to demonstrate that the measurement of the liability under PAA is not materially different from that produced under general model. However, if you expect the cashflows of the group to be significantly variable.

If you are going to go the PAA route, make sure that your auditors agree, at an early stage, that your justification is valid.

Grouping of contracts

Consider how you are going to group your contracts together.

Onerous contracts

If contracts are deemed onerous, then the the full GMM functionality needs to be applied.

Premium received

Premium received means the cash premium received by the insurer. Check that the insurer has data for premiums received, as a lot of companies don't have that data easily available.

LRC: Liability for Remaining Coverage

The release of the LRC should be based on premiums received.

Pre-acquisition costs

For example, if you paid the broker before the policy incepted.

Liability for incurred claims

Incurred claims are not simplified in the PAA; incurred claims are measured under the general model principles:

• incurred claims need to be measured based on future expected cashflows

• no discounting required if claims are expected to settle within a year; longer liability claims means that you need to think about the correct rate to discount at.

Reinsurance

Just because the underlying contracts are measured under the PAA, it does not mean that the reinsurance contracts can be measured under the PAA. What is the initial recognition point and contract boundary? Look at cashflows related to credit risk for counterparties; need access to credit risk models.

Click here to read more about accounting for reinsurance under IFRS 17.

Example 1 : Premium paid upfront

(from IFRS site here)

Insurance contract issued on 1 July 2021:

• Coverage period is 1 year from 1 July 2021 to 30 June 2022

• Premium charged is R1200

• Insurance acquisition cash flows of R180 are paid on 1 July 2021

Assume:

• Even provision of insurance services over the coverage period.

• No claims are incurred.

• The insurance contract is accounted for, under IFRS 17, as a group of insurance contracts.

Existing methodology

IFRS 17 PAA

Example 3 : Premium paid monthly

IFRS 17 PAA

Example 2 : Premium paid at the end

IFRS 17 PAA

Contractual Service Margin (CSM)

IFRS17 wants to recognise loss-making groups of insurance contracts immediately, and recognise profit from profitable groups of contracts over their term.

The normal situation for an insurer is that groups of insurance contracts are expected to be profitable. The CSM allows for the deferall of profit over the life of insurance contracts.

The CSM is "a component of the carrying amount of the asset or liability for a group of insurance contracts representing the unearned profit the entity will recognise as it provides insurance contract services under the insurance contracts in the group". The CSM is an asset (or liability) for each group of insurance contracts.

This prevents insurers from recognising the future profits upfront when policies are written, something which was allowed under IFRS4 (although not all insurance companies took advantage of that). So, at the time policies are written, no profit or loss is recognised by insurers in their income statements.

The CSM is reduced to zero over the life of each group of insurance contracts, allowing the profit to be released. Whilst most of the work for a policy is done upfront, the insurer has not been at risk or provided a service yet. This method allows profit to be realised as the insurer provides its services, and is at risk. Note that this approach does not change the actual cashflows and hence actual profit of the insurer, all it does it change the timing of the recognition of profit.

The CSM is measured at initial recognition at an amount which results in no income or expenses arising from:

• the initial reocgnition of an amount for the fulfilment cash flows.

• cash flows arising from contracts in the group

• derecognition at the date of initial recognition of:

  • any asset for insurance acquisition cash flows

  • any asset or liability previously recognised for cash flows

At the end of each reporting period, the carrying amount of a group of insurance contracts is the sum of:

• liability for remaining coverage, including both:

  • the fulfilment cash flows related to future service.

  • the contractual service margin

• Liability for incurred claims

Onerous contracts

For groups of insurance contracts which are expected to be loss-making, where the present value of outflows is greater than inflows, the full present value of the loss must be recognised, and the CSM is set to zero. This is to ensure that the insurer has sufficient assets to meet its liabilities.

Fulfilment cash flows

"An explicit, unbiased and probability-weighted estimate (ie expected value) of the present value of the future cash outflows minus the present value of the future cash inflows that will arise as the entity fulfils insurance contracts, including a risk adjustment for non-financial risk."

Check list:

Write up the justification for using the PAA:

• check that auditors agree with the justification

• Check that the insurer has the data for premiums actually received.

IFRS 17: What are Googlers interested in?

Here's a list of search terms related to IFRS17, people have been searching on Google for:

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