PAA Ind AS 117
Gap Assessment
August 6, 2025
Navigating Ind AS 117
August 6, 2025
Simplifying Insurance Accounting: The Premium Allocation Approach under Ind AS 117
As India transitions to Ind AS 117, insurers and finance leaders are navigating new measurement models for insurance contracts. Among them, the Premium Allocation Approach (PAA) stands out as a simplified yet powerful method—especially for short-duration contracts. This overview explores how PAA operates, its eligibility requirements, and its strategic significance in modern insurance accounting
What Is the Premium Allocation Approach?
The PAA is a simplified measurement model under Ind AS 117, designed for contracts with coverage periods of one year or less. It mirrors the traditional unearned premium reserve (UPR) method, making it familiar and operationally efficient for general insurers.
Key Features of PAA
- Simplified Liability Measurement: Uses premiums received to estimate the liability for remaining coverage
- No Contractual Service Margin (CSM): Unless the contract becomes onerous
- Discounting Optional: Only required if there’s a significant financing component
- Acquisition Costs: Can be deferred and amortized over the coverage period
Eligibility Criteria
To apply PAA, a group of contracts must meet either of the following:
- Coverage period ≤ 1 year, or
- Measurement under PAA is materially the same as the General Measurement Model (GMM)
How PAA Works: A Quick Breakdown
| Component | Treatment under PAA |
| Liability for Remaining Coverage (LRC) | Based on premiums received and acquisition costs |
| Liability for Incurred Claims (LIC) | Measured using fulfilment cash flows and risk adjustment |
| Discounting | Required only if financing component is significant |
| Onerous Contracts | Loss component recognized immediately if expected cash outflows exceed inflows |
Strategic Benefits of PAA
- Operational Continuity: Minimal disruption for short-term insurers
- Cost Efficiency: Reduced actuarial and system complexity
- Simplified Disclosures: Streamlined reporting for eligible contracts
- Focus on Risk Management: Frees up resources for strategic initiatives
Challenges to Watch For
- Eligibility Assessment: Requires judgment and documentation
- Onerous Contract Identification: Must monitor profitability at group level
- Transition Planning: Ensure systems can handle both PAA and GMM if needed
Final Thoughts
The Premium Allocation Approach offers a pragmatic path for insurers under Ind AS 117—especially those managing short-duration contracts. While it simplifies measurement and reporting, it still demands strategic oversight, actuarial coordination, and robust documentation.
👉 Is your organization ready to leverage PAA effectively? Our team can help assess eligibility, design policies, and align systems for seamless implementation.
