Thought Leadership

Financial services knowledge series on IFRS 17: Premium Allocation Approach (PAA) - Let’s make it simple! (Volume 3)

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Key highlights of the publication

  • The Premium Allocation Approach (PAA) method of IFRS 17 is a simplified approach for measuring insurance contract revenue and expenses over time. It is suitable for contracts with a short coverage period or those with no significant uncertainty.
  • Under the GMM, the liability for future coverage is the combination of the CSM, RA and BEL. That is replaced by just premium less acquisition cost in the PAA.
  • General insurers will not be obliged to predict future claims or do any kind of contractual service margin (CSM) assessment or tracking, which is a major advantage of the PAA.
  • Under the IFRS 17 PAA, the consistent amount of the acquisition cost amortises in future quarters. And this amount is added to the carry forwarded liability.
  • The measurement method under the PAA is on two main parts, which is like the building block approach (BBA/GMM), i.e., the Liability for Remaining Coverage period (LRC) and the Liability for Incurred Claims (LIC).
  • In our next release, we will unveil the Variable Fee Approach (VFA). It is another variant of the General Measurement Model (GMM) to calculate liabilities for the insurance contract under IFRS 17.