Internal:Training/IFRS17/The premium allocation approach: Difference between revisions
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Created page with "{{Internal:Training/IFRS17/nav-dropdown}} 🔗 '''Recall.''' In the previous page, you learned how the income statement under IFRS 17 presents insurance revenue based on service delivered, not premiums collected, along with insurance service expenses and Definition:Insurance finance income or expense|insurance finance..." |
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🔍 '''A practical comparison.''' Consider a group of one-year [[Definition:Motor insurance|motor insurance]] contracts in Germany. Under the [[Definition:General model|general model]], the insurer would project all [[Definition:Cash flow|cash flows]] over the remaining months, [[Definition:Discounting|discount]] them, compute a [[Definition:Risk adjustment|risk adjustment]], derive a [[Definition:Contractual service margin|CSM]], and release it through [[Definition:Coverage unit|coverage units]] each quarter. Under the [[Definition:Premium allocation approach|PAA]], the insurer simply starts with the [[Definition:Premium|premiums]] received, deducts [[Definition:Acquisition cost|acquisition costs]], and recognises [[Definition:Insurance revenue|revenue]] proportionally over the year. When a [[Definition:Claim|claim]] occurs, it measures the [[Definition:Liability for incurred claims|LIC]] with full rigour. The [[Definition:Income statement|income statement]] result is materially the same, but the operational cost of producing it is far lower. For [[Definition:Non-life insurance|non-life]] portfolios dominated by annual contracts, this efficiency gain is substantial.
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