The premium allocation approach

Most non-life insurers, motor, property, travel and health, measure the bulk of their business with the premium allocation approach. It looks like the accounting they used before IFRS 17, but it has new rules on eligibility, acquisition costs, onerous contracts and claims. This guide explains who can use it and works through a policy written late in the year.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 3 minute read.

Short answer

The IFRS 17 premium allocation approach (PAA) is a simplified way to measure the liability for remaining coverage, available for contracts with a coverage period of one year or less, or where it would not differ materially from the general measurement model. The liability is premiums received less revenue recognised and less any acquisition cash flows deferred, close to the old unearned premium approach. Claims are still measured as fulfilment cash flows in the liability for incurred claims. In this guide's example, a 1,200 annual policy written on 1 October shows revenue of 300 and a liability for remaining coverage of 900 at 31 December.

At a glance

Eligible
Cover of one year or less, or similar to GMM
Liability for remaining coverage
Premiums less revenue less deferred costs
Revenue
Over the cover, usually evenly
Acquisition costs
May be expensed if cover one year or less
Incurred claims
Fulfilment cash flows, with RA
Onerous
Tested only if facts suggest it
The premium allocation approachEligible: Cover of one year or less, or similar to GMM; Liability for remaining coverage: Premiums less revenue less deferred costs; Revenue: Over the cover, usually evenly; Acquisition costs: May be expensed if cover one year or less; Incurred claims: Fulfilment cash flows, with RA; Onerous: Tested only if facts suggest it.KEY FACTS AT A GLANCEThe premium allocation approachEligibleCover of one year orless, or similar to GMMLiability for remaining coveragePremiums less revenueless deferred costsRevenueOver the cover, usuallyevenlyAcquisition costsMay be expensed if coverone year or lessIncurred claimsFulfilment cash flows,with RAOnerousTested only if factssuggest itTax BakersThe premium allocation approachEligible: Cover of one year or less, or similar to GMM; Liability for remaining coverage: Premiums less revenue less deferred costs; Revenue: Over the cover, usually evenly; Acquisition costs: May be expensed if cover one year or less; Incurred claims: Fulfilment cash flows, with RA; Onerous: Tested only if facts suggest it.KEY FACTS AT A GLANCEThe premium allocation approachEligibleCover of one year or less, or similar to GMMLiability for remaining coveragePremiums less revenue less deferred costsRevenueOver the cover, usually evenlyAcquisition costsMay be expensed if cover one year or lessIncurred claimsFulfilment cash flows, with RAOnerousTested only if facts suggest itTax Bakers
Key facts at a glance, as set out in this guide.

Who can use the IFRS 17 premium allocation approach?

An insurer may use the PAA for a group of contracts if the coverage period of each contract is one year or less, or if it reasonably expects that the PAA would produce a measurement of the liability for remaining coverage that does not differ materially from the general measurement model. For longer contracts, insurers test this, often by modelling scenarios; significant expected variability in cash flows before claims are incurred, such as from interest rates or embedded options, usually rules the PAA out. The choice is made group by group.

A premium allocation approach example

A motor insurer writes annual policies on 1 October for premiums of 1,200, received in full, and pays brokers commission of 120. Its year end is 31 December. By then, claims of 200 have been incurred, none yet paid, with a risk adjustment of 10. The insurer expects to settle them within a year.

Premium of 1,200: earned and unearned at 31 DecemberPremium of 1,200: earned and unearned at 31 December1,200Premiumreceived-300Revenueearned900Liability forremaining coverage
Three months of cover earned, nine months still owed.
At 31 DecemberCommission expensedCommission deferred
Insurance revenue: 3/12 x 1,200300300
Acquisition cash flows charged(120)(30)
Incurred claims and risk adjustment(210)(210)
Insurance service result-3060
Liability for remaining coverage900810
Liability for incurred claims210210

Revenue is recognised on the passage of time, three twelfths of the premium, unless the expected pattern of claims differs significantly from that, as with seasonal risks such as winter storms, in which case revenue follows the expected incidence of claims.

Can acquisition costs be expensed?

Yes, when every contract in the group has a coverage period of one year or less, the insurer may expense acquisition cash flows when incurred. Otherwise they reduce the liability for remaining coverage and are amortised over the cover. Expensing is simpler but brings costs forward, as the example shows: the year's insurance service result is 90 lower.

How are incurred claims measured?

As under the general measurement model: the present value of expected payments plus a risk adjustment, including claims incurred but not yet reported. The insurer need not discount claims expected to be paid within one year of being incurred. Long-tail business, such as liability or workers' compensation, is discounted, and the unwinding goes to insurance finance expense.

Is there a financing adjustment to the liability for remaining coverage?

Not if, at initial recognition, the insurer expects the time between providing each part of the cover and the related premium due date to be no more than a year. For multi-year contracts paid upfront, the liability may need to reflect the time value of money.

How are onerous contracts identified under the PAA?

The insurer assumes no contracts are onerous at initial recognition unless facts and circumstances indicate otherwise, for example pricing below expected claims to win market share, or a rise in claims inflation. If they do, it compares the fulfilment cash flows for the remaining cover with the liability for remaining coverage and recognises the excess as a loss. See onerous groups.

How does the PAA differ from the old unearned premium approach?

Mostly in presentation and the details, which also changed how insurers calculate their combined ratio: revenue replaces gross written premiums as the top line, claims carry an explicit risk adjustment, discounting of long-tail claims is required, and the onerous test replaces the old liability adequacy test. See the general measurement model and insurance accounting under IFRS 17.

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Questions people ask

What is the IFRS 17 premium allocation approach?

A simplified measurement of the liability for remaining coverage, based on premiums received less revenue recognised, for short-duration contracts.

Who can use the PAA?

Insurers with groups of contracts whose coverage period is one year or less, or where the PAA would not differ materially from the general measurement model.

Can acquisition costs be expensed under the PAA?

Yes, if each contract's coverage period is one year or less; otherwise they are deferred and amortised.

Do incurred claims have to be discounted under the PAA?

Not if they are expected to be paid within one year of being incurred.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 17 Insurance Contracts

Rules and fees change. If you are reading this long after October 7, 2026, confirm the figures with the source before you rely on them.

InsuranceThe IFRS 17 general measurement modelInsuranceOnerous groups of insurance contractsInsuranceInsurance accounting: IFRS 17 in practice

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This guide is general information. It is not tax or legal advice for your situation.