Overview

This section defines how the contract boundary is critical to analyzing whether an insurer can use the PAA for some contracts. The PAA, or simplified approach, can be used when the contract coverage period, including premiums included in the contract boundary, is one year or less or if the PAA produces a liability.

The first step to assess its use is to define the contract boundary and the coverage period. Many non-life insurance contracts meet the first criteria by having a coverage period of one year or less. However, contracts with longer coverage periods, such as surety, engineering, construction, or lenders' mortgage insurance will need to demonstrate they meet the second criterion.

Non-life insurers in this scenario will need to develop more complex modeling than they currently apply, requiring more data and the development of long-term assumptions. This also means insurers will present financial statements with a mix of valuation techniques, complicating the way results are analyzed and communicated.

The premium allocation approach assumes that no contracts are onerous at initial recognition unless facts and circumstances indicate otherwise. Assessment of whether an individual or a set of contracts belongs to those groups is based on the likelihood of changes in applicable facts and circumstances.

Longer-term non-life contracts, such as construction, engineering, and lenders' mortgage insurance, may not meet the criteria. As a result, the insurer will face additional complexity in its valuation, modeling, and associated processes. Some life insurance contracts currently using long-duration measurement models may qualify to be able to use the PAA approach, which simplifies the modeling required but may also lead to unexpected results.