The Committee on Property and Casualty Insurance Financial Reporting (PCFRC) and the Committee on Life Insurance Financial Reporting (CLIFR) have prepared this educational note to provide guidance on assessing the eligibility of insurance contract groups for the application of the simplified premium allocation approach (PAA) within the scope of the International Financial Reporting Standard 17 – Insurance Contracts (IFRS 17).
This educational note is relevant to the IFRS 17 valuation of all insurance contract groups, including Property & Casualty (P&C) and Life & Health (L&H), which are potentially eligible for the PAA.
The educational note is structured into eight sections, plus three appendices. Section 1 introduces the option of measuring the liability for remaining coverage (LRC) using the PAA rather than the general measurement approach (GMA). Section 2 provides an overview of the three key criteria for eligibility of the PAA, which are discussed in detail in the next three sections:
• Section 3: Determining whether the contracts in a group each have a coverage period of 12 months or less.
• Section 4: Performing the assessment of “would not differ materially” for the LRC determined using the GMA and the PAA.
• Section 5: Understanding the meaning of “significant variability in the fulfilment cash flows.”
The remaining sections address additional considerations relating to onerous contracts, reinsurance, and subsequent assessments of similar contracts in new groups. The appendices provide illustrative examples supporting the concepts discussed in Sections 4 and 5.