Page 57 - MC14326 all pages
P. 57
Lyndall Green The South African Insurance Industry Survey 2016 | 53
Manager, Would the application of the
Department of Professional Practice premium alocation approach
Tel: +27 82 710 4976
Email: lyndall.hobson@kpmg.co.za result in business as usual?
Esther Pieterse The new Insurance Contracts Standard (ICS) is expected to be issued at the end of the year.
The focus of the ICS is the Building Block Approach (BBA) which has been introduced as the
Associate Director, new model to recognise and measure insurance contracts, impacting mostly life insurers.
Department of Professional Practice Many short-term insurers may have argued that the new ICS will not impact them as a
Tel: +27 82 719 5806 simplified model, the Premium Allocation Approach (PAA), will result in business as usual.
Email: esther.pieterse@kpmg.co.za The PAA is intended to be a proxy for the more complex BBA.
For short and long-term insurers wanting to apply the PAA, the automatically meet the criteria to apply the PAA. Contracts
most important consideration is whether the contracts written with a longer tail, such as engineering and liability business,
by the insurers will meet the criteria for the PAA to be applied. may not meet the above criteria for the application of the PAA,
Use of the PAA is permitted (but not required) if: and therefore the BBA should be applied. Short-term insurers
should consequently review the possible impacts which the
–– the coverage period of the contract at initial recognition is new ICS may have on their contracts.
one year or less; or
We have prepared an example demonstrating the application
–– use of the PAA produces measurements that are a of the PAA. We have compared the results in terms of the
reasonable approximation to those of the BBA – i.e. at PAA with the current unearned premium approach applied by
inception, the entity expects no significant variability in the insurers as well as the application of the BBA. The example
fulfilment cash flows. illustrates how PAA is a good proxy of the BBA.
Many South African short-term insurers are expected to be able Background to the example:
to meet the criteria for applying the simplified PAA - thereby – A new insurer enters into a portfolio of 100 annual insurance
avoiding some complexities introduced by the BBA. However,
not all contracts currently considered to be short-term will policies covering damage to similar commercial buildings.
