Section 01
What Is the PAA?
The Premium Allocation Approach is a simplified alternative to the General Measurement Model (GMM/BBA), set out in IFRS 17 Para 53–59. It is designed for short-duration contracts, where the full GMM machinery adds little information.
The idea
A Simpler Model, Same Standard
An optional measurement model for eligible groups of contracts, chosen group by group at initial recognition.
LRC
Simplified to a UPR-Style Balance
The Liability for Remaining Coverage works much like the traditional Unearned Premium Reserve. No CSM is measured or tracked.
LIC
Still Follows GMM Principles
The Liability for Incurred Claims is not simplified: best estimate of claims and expenses plus a risk adjustment, including IBNR.
Who benefits
P&C and Short-Term Health
Motor, property, travel and annual health contracts, cutting actuarial complexity and implementation cost.
"A huge benefit of the PAA is that general insurers will not be required to estimate future claims or do any form of CSM measurement or tracking."
— Grant Thornton, 2021Section 02
Eligibility: Two Pathways
A group of contracts may use the PAA if either condition in Para 53 is met. Eligibility is assessed at initial recognition of the group and is not reassessed afterwards.
Pathway 1 · AutomaticPara 53(b)
Coverage ≤ 1 Year
- No further testing. If every contract in the group has a coverage period of one year or less, the PAA is available automatically.
- Motor: annual policies, third-party liability, comprehensive cover.
- Property & travel: fire, marine cargo, short-term travel policies.
- Annual health & group life: annually renewable contracts, personal accident.
- Most P&C insurers qualify this way. The PAA mirrors the UPR method already in use.
Pathway 2 · DemonstratedPara 53(a)
Coverage > 1 Year
- Materiality test. The entity must reasonably expect the PAA to give an LRC that does not differ materially from the GMM over the coverage period.
- Run both models: calculate the LRC under PAA and GMM and compare. Many firms run the GMM anyway to show eligibility (Grant Thornton, 2021).
- Not met if significant variability in fulfilment cash flows is expected before claims are incurred (Para 54).
- Tested once at initial recognition, not in later reporting periods.
Practical benchmark: an ITB study (2025) treated an LRC difference below 15% as not material. IFRS 17 and PSAK 117 set no numeric threshold, so each entity documents its own materiality judgement.
Key risk: if PAA ≈ GMM cannot be demonstrated for a group with coverage over one year, the entity must apply the full GMM to that group, including CSM tracking.
IFRS 17 Para 53–54 · ITB / Aprilia Dianpermatasari (2025) · Grant Thornton (2021) · PSAK 117 (IAI/OJK)
Section 03
LRC Under PAA: The Simplified Calculation
PAA Core Formula
LRC0 = Premiums Received − Acquisition Cash Flows
At initial recognition (Para 55(a)). Each period after: + premiums received − acquisition cash flows paid + amortisation of acquisition cash flows − insurance revenue (Para 55(b)).
Insurance revenue is recognised on the basis of the passage of time, or on the expected pattern of release of risk when that differs significantly (Para B126). In effect, this is the traditional UPR approach, now formalised under IFRS 17 and PSAK 117.
No PVFCF
No present value
No projection or discounting of future cash flows for the LRC
No RA
No risk adjustment
Not required for the LRC (it returns in the onerous test)
No CSM
No CSM tracking
Contractual service margin is not measured
No disc.
No discounting
Unless premiums fall due more than a year from the coverage they pay for (Para 56)
Option for one-year cover: where each contract's coverage is one year or less, acquisition cash flows may be expensed when incurred (Para 59(a)). The LRC at inception then equals the premium received.
IFRS 17 Para 55–56, 59(a), B126 · Grant Thornton (2021)
Section 04
Worked Example: Motor Insurance
Annual premium Rp 1,200,000 received at inception · acquisition cost Rp 120,000 (10%) · 12-month coverage · revenue recognised straight-line.
LRC at inception
Rp 1,080,000
Premium 1,200,000 − acquisition cost 120,000
Monthly insurance revenue
Rp 100,000
Rp 1,200,000 ÷ 12 months, straight-line (Para B126)
Acquisition cost amortised
Rp 10,000
Rp 120,000 ÷ 12, amortised as an insurance service expense
LRC at year-end
Rp 0
Net release of Rp 90,000 a month
| Point | Revenue (cum.) | Acq. amortised (cum.) | Net LRC release | LRC closing |
|---|---|---|---|---|
| Inception | 0 | 0 | 0 | 1,080,000 |
| Q1 · month 3 | 300,000 | 30,000 | 270,000 | 810,000 |
| Q2 · month 6 | 600,000 | 60,000 | 540,000 | 540,000 |
| Q3 · month 9 | 900,000 | 90,000 | 810,000 | 270,000 |
| Q4 · month 12 | 1,200,000 | 120,000 | 1,080,000 | 0 |
Key finding: one-year motor cover is eligible for the PAA automatically under Para 53(b), so no comparison with the GMM is needed to use it.
PAA vs GMM: the PAA uses premium less acquisition cost with a straight-line release, and no PVFCF or CSM. The GMM would need PVFCF, a risk adjustment and CSM tracking every period.
A claim in March: a claim of Rp 800,000 incurred in March moves into the LIC, measured as best estimate FCF plus risk adjustment. If it is settled within 12 months, no discounting is required (Para 59(b)). The LRC simplification never applies to the LIC.
Illustrative figures · IFRS 17 Para 55, 59, B126 · PSAK 117
Section 05
LIC Under PAA: No Simplification Here
A common misconception: the PAA simplifies the LRC only. The Liability for Incurred Claims is measured with the same principles as the GMM.
LIC Formula — Same as GMM
Current fulfilment cash flow estimates (best estimate of claims and expenses) plus a risk adjustment for non-financial risk. Always required.
FCF estimatesRisk adjustmentPara 59
Discounting Trigger — The 1-Year Rule
Discounting is required when claims are expected to be paid more than one year after they are incurred (Para 59(b)). The LIC is measured at current rates. If the entity presents finance expense in OCI, the P&L uses the rate at the date the claim was incurred (Para B72(e)(iii)).
> 12 months → discountPara 59(b)
Short-Tail P&C — Usually No Discounting
Motor and property claims typically settle within 12 months, so LIC discounting is generally not required. A practical relief for most Indonesian general insurers.
MotorProperty≤ 12 months
Long-Tail P&C — Discounting Required
Liability, workers' compensation and marine claims can settle well beyond 12 months, so discounting applies and complexity approaches the GMM. CIA/CAS (2023) confirm discounting matters mainly for these lines.
LiabilityWorkers' compMarine
IFRS 17 Para 59, B72(e)(iii) · CIA / CAS (May 2023)
Section 06
Onerous Contracts Under PAA
If FCF for remaining coverage > LRC carrying amount → the difference is a loss in P&L (Para 58)
— IFRS 17 Para 57–58, simplified onerous test under the Premium Allocation ApproachPara 57 · Presumption
Assume Not Onerous
Contracts are assumed not to be onerous at initial recognition unless facts and circumstances indicate otherwise.
Para 58 · Test
FCF vs LRC Carrying Amount
Compare the fulfilment cash flows for remaining coverage, including the risk adjustment, with the LRC carrying amount.
Indicator
Combined Ratio > 100%
(Claims + expenses) ÷ earned premium above 100% signals that a group may be onerous.
Loss component
Recognised in P&L
The loss component increases the LRC and is remeasured at each reporting date while facts and circumstances still point to onerous contracts. There is no CSM under the PAA to absorb it.
Key insight: despite the PAA's simplicity, onerous contract testing is mandatory whenever facts and circumstances indicate a loss.
IFRS 17 Para 47–52, 57–58
Section 07
PAA vs GMM: What's Simplified, What's Not
| Dimension | PAA | GMM |
|---|---|---|
| LRC measurement | Premium-based (UPR-like)Simple · Para 55 | PVFCF + RA + CSMComplex · Para 32 |
| CSM tracking | Not requiredNo CSM calculated | Every reporting periodPara 43–46 |
| Revenue recognition | Passage of time or risk patternFlexible · Para B126 | Coverage units allocationActuarial · Para B119 |
| LRC discounting | Not required unless a significant financing componentOften exempt · Para 56 | Always requiredPara 36 |
| LIC measurement | FCF + risk adjustmentSame as GMM | FCF + risk adjustmentPara 40 |
| LIC discounting | Required if settlement > 1 yearConditional · Para 59(b) | Always requiredPara 36 |
| Risk adjustment | LIC onlyNot for the LRC | LRC and LICPara 37 |
| Onerous test | FCF vs LRC carrying amountLess precise · Para 57–58 | CSM absorbs adverse changes firstMore precise · Para 47–52 |
| Data requirements | LowerPremium-based inputs | HigherGranular cash-flow modelling |
Key insight: LIC measurement is identical under both models. The real divergence is LRC complexity, CSM tracking and data demands: the PAA is simpler, but not straightforward (Grant Thornton, 2021). PSAK 117 permits both models for Indonesian insurers.
Section 08
PAA for Indonesian P&C Insurers
Automatic PAA eligible
Motor Insurance (Asuransi Kendaraan Bermotor)
One-year coverage, so PAA eligibility is automatic. The largest P&C line in Indonesia per AAUI data; the ITB 2025 study also supports PAA for motor under normal underwriting scenarios.
Automatic PAA eligible
Property Insurance (Asuransi Properti)
Typically written on one-year terms, qualifying automatically. Simplified LRC measurement applies, with no CSM tracking under PSAK 117.
Automatic PAA eligible
Travel Insurance
Coverage of days to weeks, well within the one-year threshold. Premium-based LRC, with revenue recognised over the coverage period.
Automatic PAA eligible
Health Insurance (Annually Renewable)
Each policy year is assessed on its own, so the PAA applies per contract year. The onerous test still applies if facts and circumstances indicate a loss.
OJK requirement: quarterly PSAK 117 reporting is mandatory from Q1-2025; OJK's June 2025 report noted compliance issues at some insurers. Legal basis: POJK No. 22/2024 and SEOJK No. 23/SEOJK.05/2024.
PSAK 117 · POJK No. 22/2024 · SEOJK No. 23/SEOJK.05/2024 · AAUI industry data · ITB (2025)
Episode 5 — Key Takeaways
PAA eligibility — contracts with coverage of one year or less qualify automatically. Longer contracts need a materiality test showing PAA results are not materially different from the GMM.
LRC: simplified measurement — a UPR-like, premium-based calculation with no PVFCF, no risk adjustment and no CSM tracking, which cuts actuarial complexity significantly.
LIC: still GMM principles — current FCF estimates plus a risk adjustment. Discounting applies if settlement runs beyond 12 months (Para 59(b)).
Onerous contracts: the test still applies — if FCF exceeds the LRC, a loss is recognised immediately in P&L, and it is reviewed at every reporting date under PSAK 117.