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Will the status quo continue for short-term insure

Will the status quo continue for short-term insure
30-03-12 / Staff Writer

Will the status quo continue for short-term insure

The IASB exposure draft on insurance contracts indicated that the Premium Allocation Approach (PAA) is required for insurance contracts where the coverage period is approximately one year or less (consistent with many short-term insurance products in our market), and this proposal was generally welcomed, writes Dewald van den Berg of PwC.

As alluded to above, the IASB views the premium allocation approach as a proxy for the full building blocks measurement approach, whereas the FASB views it as a completely different model. This difference in view significantly impacts the tentative decisions by the two Boards.

In recent education sessions, the staff proposed (in a bid to converge the two Boards) that insurers should apply the building block approach to individual contracts if, at the start of the coverage period, any of a number of conditions are met. Some constituents have questioned whether this was an over-engineering of the eligibility criteria and the IASB seems to support a <strong>practical expedient</strong> to allow contracts with less than 12 months coverage period to be accounted for under the PAA.

Short-term insurers often sell annual policies with premiums which are payable monthly. In terms of the current local Generally Accepted Accounting Principles(GAAP), an Unearned Premium Provision (UPR) is raised for the full premium when the policy is written and the UPR is amortised over the coverage period in line with the exposure to risk under the policy. The IASB discussions around the mechanics of the PAA have been closely aligned with current practice applied to UPRs by short-term insurers. The building blocks approach will apply to the incurred claims liability.

The primary differences between the PAA and building block approach are the following:

under the PAA the measurement of the liability for remaining coverage (i.e. the UPR) would not routinely be updated to reflect changes in estimates of future premiums, claims or risk; and

the PAA reflects a gross presentation of the premium receivable and UPR liability, whereas under the building block approach, the net contract position is presented.

The Boards have not yet decided whether the PAA will be required or permitted as an alternative to the building blocks approach. On discounting and accretion, the IASB is generally leaning towards the view that discounting and accretion in the measurement of liabilities for remaining coverage should be required when a significant financing component is present.

Will short-term insurers welcome these developments? To me this question can only be answered once insurers weigh up the cost and benefits of presenting their results in a familiar manner consistent with current local GAAP or, looking forward, measuring and presenting their results under the building blocks approach in a manner more aligned with the SAM proposals, potentially eliminating the need to run multiple measurement systems.

We will elaborate on the latest developments on the treatment of acquisition costs as well as any decisions that may be taken on the PAA at the upcoming joint IASB/FASB meeting in a future newsletter.

*This article was written by Dewald van den Berg and appeared in the February, 2012 Bulletin.

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