Portfolio of insurance contracts

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Insurance contracts subject to similar risks and managed together.

Level of Aggregation

Entities should aggregate contracts at inception in groups for recognition, measurement, presentation, and disclosure. Groups should not be reconsidered after initial recognition.

An entity should initially identify portfolios of insurance contracts. A portfolio of insurance contracts is defined as insurance contracts subject to similar risks and managed together. It is generally expected that contracts in different product lines will have different risks. For example, single-premium fixed annuities and regular term life insurance contracts are expected to be in different portfolios, because they cover different insurance risks (longevity and mortality).

Further considerations:

Applying the definition of a portfolio in practice might require judgement. Entities might define portfolios in different ways, as ‘managed together’ and ‘similar risks’ represent areas of judgement. This could affect how insurance contracts are measured. IFRS 17 uses the term ‘portfolio’ for a number of purposes, such as defining a group of insurance contracts and insurance acquisition cash flows. The way in which an entity defines portfolio should be applied consistently for all of these different purposes.

Further disaggregation:

Portfolios should be further disaggregated into groups of insurance contracts that are, on initial recognition:
1. onerous;
2. profitable, with no significant risk of becoming onerous; and
3. profitable, with significant possibility of becoming onerous (remaining contracts).

It is possible that, for an individual portfolio, there are no contracts in one or even two of the three groups. For example, if an entity expects that all insurance contracts in a portfolio are not onerous and have no significant risk of becoming onerous, only one out of three profitability-based groups will be required.

In some jurisdictions, laws and regulations might constrain an insurer’s practical ability to set prices or level of benefits based on a specific characteristic (such as gender anti-discrimination laws). An entity should not allocate contracts to different groups based on different profitability resulting from such constraints. Other situations, such as general anti-discrimination laws that do not specifically relate to insurance premiums or benefits, self-regulatory practices or practices based on the law in other jurisdictions not applicable to the contract, will not qualify for the exemption.

It might not be necessary to assess the profitability of each insurance contract on initial recognition if an entity has reasonable and supportable information to conclude that each contract in a portfolio, a group or a set (being an aggregation of contracts that is neither a portfolio nor a group) has the same profitability.

Profitability of insurance contracts should be assessed individually at inception if the entity does not have such information.

An entity should assess the significance of the risk of contracts becoming onerous based on the likely changes in assumptions affecting contract profitability using internal reporting that captures information about estimates. In addition, a group can only include contracts that have been issued within one year of each other. A group could consist of one contract.

Individual versus aggregated assessment of profitability of insurance contracts at inception for aggregation into groups

Often, entities will have information about the profitability of each insurance contract in a portfolio, a group or a set without assessing individually each insurance contract. The assessment of profitability should be made based on the information available to an entity at inception. Throughout the coverage period, the information about the profitability of each insurance contract in a group will change and, ultimately, some contracts in the group will be profitable and some will be onerous. However, for a sufficiently homogeneous population of contracts, the expectation about the profitability of each contract at inception measured on an expected probability-weighted basis is likely to be similar.

An entity cannot use information about insurance contracts in a portfolio, a group or a set for contracts on an aggregate basis if the insurance contracts are not sufficiently homogeneous. For example, an entity might have reasonable and supportable information about a portfolio of motor insurance contracts that demonstrates that it is expected to be profitable at inception. However, at inception on a probability-weighted basis, policies issued to female drivers are expected to be profitable with no significant risk of becoming onerous, policies issued to male drivers of a specified age group are expected to be onerous, and policies issued to other male drivers will be profitable with significant possibility of becoming onerous. Aggregation of contracts based on profitability of the portfolio as a whole is not acceptable (in this example), because the entity cannot conclude that each contract in the portfolio has the same profitability at inception. However, it might be possible to use separate information about policies issued to female drivers, male drivers of a specified age group and other male drivers without assessment of each individual insurance contract in each of the indicated sets. The exception on regulatory pricing might also apply.

For some contracts, such as some bespoke (individually tailored) commercial contracts, there will be no information on an aggregated basis, and entities will be required to assess profitability of each contract at inception individually.

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