Eligibility for the simplified approach

Learning objectives

• List the two conditions, either of which is sufficient to use the premium allocation approach.L1
• Determine, from the facts of a case, whether a group is eligible for the simplified approach.L2

Normative references

• IFRS 17 §53The premium allocation approach may be used for a group if, at its inception, the entity reasonably expects that the liability for remaining coverage would not differ materially from that under the general model, or if the coverage period of each contract in the group is one year or less.
• IFRS 17 §54The criterion in para. 53(a) is not met if, at the inception of the group, the entity expects significant variability in the fulfilment cash flows before a claim is incurred; such variability increases, for example, with the extent of cash flows related to embedded derivatives and with the length of the coverage period.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• Under what conditions may an entity use the premium allocation approach for a group of contracts?L1
• Fidèle SA reviews three groups of contracts at inception. Group A: six-month contracts. Group B: three-year contracts, for which the entity reasonably expects a liability for remaining coverage that does not differ materially from that of the general model (management's judgement). Group C: three-year contracts, for which the expected difference from the general model is significant. Which groups may use the premium allocation approach?L2
• An analyst rules out the premium allocation approach for a group of nine-month contracts, writing: "The liability for remaining coverage could differ significantly from that of the general model; the approach is therefore excluded." What is the error in this reasoning?L2