Page 41 - The Insurance Times August 2022

while simultaneously ensuring up-front booking of the finance component have to adjust the liability for value
loss, if any. of money. However this is made optional for those
Initially Insurance contracts have to be measured by groups of longterm policies eligible for adopting
general measurement model as stated above, premium allocation approach.
Subsequent measurement at reporting periods involves While deciding the eligibility, the eligibility of
updating all the blocks and will have an additional reinsurance contracts held should be assessed
feature of splitting the measurement under the independently of the eligibility of underlying insurance
following categories. contracts. (Reinsurance contracts issued as well as held,
have great degree of variations. (financial year,
Liability for Incurred Claims / (relating to past services
underwriting year, policy year, proportional and non
which willl not have CSM )
proportional treaties) How many reinsurance contracts
Liability for Remaining Services / Coverage (relating to
of non-life insurers become eligible for premium
future services - measured on the lines of initial
allocation approach?)
measurement).
Thus estimation of fulfilment cashflows, discounting of these 3. Variable Fee Approach : This approach is restricted in
cashflows, adjusting them for financial and non financial risks the sense that it is applicable only for Insurance
and managing the CSM for immediate recognition of losses contracts with direct participation features. Nor is it
and spreading of profits over the service period are the core permitted or used for reinsurance contracts either held
features of the measurement concept under general or issued. Based on contractual entitlement of policy
mesurment model. holders for a share in the fair value returns/profits,
policies are calssified as participatory and non-
2. Premium Allocation Approach : This (comparatively, participatory. The entitlement may be discretionary or
simple model) is an alternative approach for insurers who non-discretionary. The variable fee approach differs
meet the prescribed conditions. Under this approach from the general mesurement model with regard to the
there is no need for separate identification of the four items to be adjusted in the CSM. Initial measurement
building blocks observed in the general measurement of CSM is similar to that under general measurement
model. Hence there is no CSM under this model. Current model. The difference is in the subsequent
practices of un-earned premium and the premium measurements when the insurers share of changes in
deficiency prevailing in non-life industry, approximates to returns on underlying items (items for the returns of
the new concept of liability for remaining coverage. The which policyholders are entitled) affects the CSM. In this
Premium Allocation Approach also permits the expensing approach, Insurer deducts as fee some share of the fair
of acquisition cashflows. To be eligible to adopt this value of the underlying items along with some amount
approach a group of contracts has to fullfill one of the relating to fulfilment cashflows which do not vary with
following two conditions. Either the period of contracts the underlying returns. The changes in share of the
should be one year or less, or the adoption of this insurer in returns of underlying items are also adjsuted
approach will yield same results for liability for remaining in the CSM. It may be noted that all direct participation
coverage, as those of the general measurement model. contracts may not qualify fo this model. Some of them
Majority of policies of non-life insurers have a period of may have to be covered in GMM
one year or less and will be eligible for this model of
measurement. The long term policies of non-life insurers
C. Changes in the Financial Statements -
have to comply with the second criteria mentioned
Statement of Financial Position and Statement of
above. These long term policies of non-life insurers can
Financial Performance (Statement of Profit and
be classified into two categories. Category one which
qualifies for Premium Allocation Approach and category Loss and Statement of Other Comprehensive
two which does not qualify for Premium Allocation Income)
Approach. The second category has to be dealt with the
Ultimately, various concepts and models developed and
general measurement model / building block model. In
prescribed by the standard have to be reflected in the
addition the following features of Premium Allocation
financial statements of the insurers. Hence some changes
Approach are worth noting.
in the financial statements are natural and inevitable. Few
Normally groups of insurance contracts with significant implications in this regard are summarised below
The Insurance Times, August 2022 41