The recognition of premium revenue in this form should be measured on a basis that is consistent with the measurement of Premium Liabilities as measured in accordance with GPS 210 Liability Valuation for General Insurers. Premium revenue is to be disclosed by type of business (direct business and inward reinsurance business), and premium revenue is to be recognised in line with the following:
Premium revenue is to be recognised fully upfront when the business is written (i.e. at the attachment date) as soon as the amount can be reliably measured. For reasons of practicality, attachment date may be determined in accordance with the provisions of AASB 1023 i.e. many insurers may use a basis of recognition that attempts to approximate this date. These bases are predicated on assumptions; for example, a direct insurer may assume that risk attaches to all policies from the middle of the month in which they are written, and a reinsurer may assume, in relation to premiums ceded to it, that risk attaches from the assumed attachment date of the underlying direct insurance policies or of the indemnity periods. Such bases are acceptable provided that they do not result in the recognition of a materially different amount of premium revenue in a particular financial year than would be the case if recognition occurred from the date of attachment of risk for each policy;
Premium revenue will need to be discounted where premium revenue under an insurance contract is to be received beyond the current year of cover. In these instances use discount rates as required in measuring claims liabilities in accordance with GPS 210 Liability Valuation for General Insurers;
Premiums written is only to be recognised as revenue when the insurer is on risk for the insurance cover provided (i.e. contract for insurance);
Premium revenue includes the value of future premium receipts under existing insurance contracts through to the end of the period insurance covered and is to reflect the probability of lapses or cancellations by policyholders and a measurement of cash flows from future renewals but only to the extent that the inclusion of renewals are uncancelable and are unfavourable to the insurer;
Premium revenue excludes cash flows from future insurance contracts and investment returns from current or future investments;
Premium revenue excludes amounts collected on behalf of third parties i.e. government stamp duty and taxes;
Levies charged to customers are to be included as premium revenue such as fire service levies. Such levies are expenses of the insurer rather than government charges directly upon those insured. The amount paid by the insurer to government authorities does not depend on the amounts collected from those insured in relation to the levies and charges;
Section Premium revenue - Financial Sector (Collection of Data) determination No. 19 of 2005 - Premium revenue | Zoe
Premiums refunds and rebates are to be deducted from premium revenue;
For installment premium policies, the amount of the annualised premium is to be used;
Where premium is calculated on an adjustment basis, the estimated annual premium is to be brought to account, with the estimated premium being replaced by the actual amount as it becomes known. Where premium is accepted on a deposit basis the full annual premium is to be brought to account; and
Premium revenue must be gross of reinsurance expense.
The difference in accounting treatment between AASB 1023 and regulatory reporting purposes is outlined below:
AASB 1023 requirements
Under AASB 1023 premium written is recognised as premium revenue on an earned/unearned basis. That component that is unearned is recognised as a liability – “Unearned Premium Provision”. While the APRA prudential standards have changed the accounting recognition requirements for Outstanding Claims Liabilities and Premium Liabilities, it is silent on the accounting treatment for the recognition of premium revenue.
APRA requirements
It is important to consider the accounting treatment underlying the recognition of Premium Liabilities comparative to that for unearned premium provision, specifically the profit and loss treatment. The earned/unearned basis for recognition of premium revenue prescribed by AASB 1023 is not appropriate for the APRA prudential forms as it is not consistent with the APRA framework for measuring insurance liabilities under GPS 210 Liability Valuation for General Insurer. The objective of the measurement of Premium Liabilities is to recognise potential future claim liabilities arising out of new insurance business written (on a prospective basis). Accordingly to be consistent, it is more appropriate to recognise premiums written up front as premium revenue.
For the “Direct business” and “Reinsurance” business, amounts are to be reported as follows:
Business written:
Include value of insurance business written directly by the insurer. Include inward reinsurance premiums under the “Reinsurance” section of Type of Business column. Inward reinsurance includes amounts, which relate to inward facultative reinsurance and to inward treaty reinsurance.
Do not include business sourced through insurance intermediaries such as co-insurance, underwriting pools or Joint Ventures, or portfolio transfers. These are to be disclosed in separate columns.
Underwriting pools/joint ventures
Only include premium revenue from business sourced through insurance intermediaries such as co-insurance, underwriting pools or Joint Ventures.
Insurance business allocated through underwriting pools and coinsurance arrangements by an entity acting as agent must be accounted for by the accepting insurer as direct insurance business (AASB 1023 ‘Financial Reporting of General Insurance Activities’).
Joint ventures are to be interpreted as defined by the Australian Accounting standards AASB 1006 ‘Interests in Joint Ventures’.
Direct insurers or reinsurers may form underwriting pools or enter coinsurance arrangements as vehicles for jointly insuring particular risks or types of risks. Premiums, claims and other expenses are usually shared in agreed ratios by insurers involved in these arrangements. Many underwriting pools and coinsurance arrangements involve the acceptance of risks by an entity acting as an agent for pool members or coinsurers. The entity receives premiums and pays claims and expenses, and allocates shares of the business to each pool member or coinsurer in agreed ratios. As the entity acting as agent is effectively not an insurer, the business allocated to pool members and coinsurers is not reinsurance business. Pool members and coinsurers will need to treat such business allocated to them as direct insurance business.[2]
Some underwriting pools and coinsurance arrangements involve members of the pool or coinsurers directly underwriting risks and then passing all of those risks into the pool or arrangement. These risks are then shared among pool members or coinsurers. For this type of underwriting pool or arrangement, an insurer treats its share of the business that other insurers place with the pool or arrangement as inwards reinsurance, and the business that it writes and passes into the pool or arrangement as direct insurance business which it reinsures to the extent of the shares in the pool or arrangement of the other pool members or coinsurers. This approach results in the insurer properly reflecting its obligations to those it has directly insured and the substance of the transactions with the pool members or coinsurers.
Portfolio transfers/acquisitions
Include the amount of premium revenue arising on policies associated with business sourced through portfolio acquisition/transfer.
Portfolio transfer is a term used to describe the process by which premiums and claims on direct insurance business is transferred from one insurer to another by means of direct sale, not by reinsurance. Responsibility in relation to claims on transferred insurance business passes from the transferring insurer to the accepting insurer. The transfer must be accounted for as a portfolio assumption by the accepting insurer, and by recognising the relevant amount of premium revenue, premium liabilities and outstanding claims liabilities.