clearly related to one of the components should be systematically and rationally allocated
between components. Insurance acquisition cash flows and some fulfilment cash flows
relating to overhead costs do not clearly relate to one of the components. A systematic
and rational allocation of such cash flows is consistent with the requirements in IFRS 17
for allocating acquisition and fulfilment cash flows that cover more than one group of
insurance contracts to the individual groups of contracts, and is also consistent with the
requirements in other IFRSs for allocating the costs of production – the requirements in
IFRS 15 and IAS 2 – Inventories, for example. [IFRS 17.BC113].
For the purpose of separation an entity should not consider activities that an entity must
undertake to fulfil a contract unless the entity transfers a good or service to the
policyholder as those activities occur. For example, an entity may need to perform
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various administrative tasks to set up a contract. The performance of those tasks does
not transfer a service to the policyholder as the tasks are performed. [IFRS 17.B33].
A good or non-insurance service promised to a policyholder is distinct if the policyholder
can benefit from the good or service either on its own or together with other resources
readily available to the policyholder. Readily available resources are goods or services that
are sold separately (by the entity or by another entity), or resources that the policyholder
has already got (from the entity or from other transactions or events). [IFRS 17.B34].
A good or non-insurance service that is promised to the policyholder is not distinct if:
[IFRS 17.B35]
• the cash flows and the risks associated with the good or service are highly
interrelated with the cash flows and risks associated with the insurance
components in the contract; and
• the entity provides a significant service in integrating the good or non-insurance
service with the insurance components.
The Board considered, but rejected, the possibility to separate non-insurance
components that are not distinct because it would not be possible to separate in a non-
arbitrary way a component that is not distinct from the insurance contract nor would
such a result be desirable. [IFRS 17.BC114].
The following example, based on Example 5 accompanying IFRS 17, illustrates the
requirements for separating non-insurance components from insurance contracts.
[IFRS 17.IE51-55].
Example 52.16: Separating components from a stop-loss contract with claims
processing services
An entity issues a stop-loss contract to a policyholder (which is an employer). The contract provides health
coverage for the policyholder’s employees and has the following features:
• insurance coverage of 100% for the aggregate claims from employees exceeding €25 million (the ‘stop
loss’ threshold). The employer will self-insure claims from employees up to €25 million; and
• claims processing services for employees’ claims during the next year, regardless of whether the claims
have passed the stop-loss threshold of €25 million. The entity is responsible for processing the health
insurance claims of employees on behalf of the employer.
Analysis
The entity considers whether to separate the claims processing services from the insurance contract. The
entity notes that similar services to process claims on behalf of customers are sold on the market.
The criteria for identifying distinct non-insurance services are met in this example because:
• claims processing services, similar to the services to process the employers’ claims on behalf of the
employer, are sold as a standalone service without any insurance coverage;
• the claims processing services benefit the policyholder independently of the insurance coverage. Had
the entity not agreed to provide those services, the policyholder would have to process its employees’
medical claims itself or engage other service providers to do this; and
• the cash flows associated with the claims processing services are not highly interrelated with the cash
flows associated with the insurance coverage, and the entity does not provide a significant service of
integrating the claims processing services with the insurance components.
Accordingly, the entity separates the claims processing services from the insurance contract and accounts for
them applying IFRS 15.
Insurance contracts (IFRS 17) 4463
5
LEVEL OF AGGREGATION
IFRS 17 defines the level of aggregation to be used for measuring insurance contracts and
their related profitability. This is a key issue in identifying onerous contracts and in
determining the recognition of profit or loss and presentation in the financial statements.
The starting point for aggregation is a portfolio of insurance contracts. A portfolio
comprises contracts that are subject to similar risks and are managed together. [IFRS 17.14].
Once an entity has identified its portfolios of insurance contracts, it should divide, on
initial recognition, each portfolio, at a minimum, into the following three ‘buckets’
referred to as groups: [IFRS 17.16]
• contracts that are onerous at initial recognition (except for those contracts to
which an entity applies the premium allocation approach – see 5.3 below);
• contracts that have no significant possibility of becoming onerous subsequently; and
• all remaining contracts in the portfolio.
This can be illustrated as follows:
Portfolio X
Portfolio Y
Group B
Group B
No significant
No significant
Group A
Group C
Group A
Group C
possibility of
possibility of
Onerous
All remaining
Onerous
All remaining
becoming
becoming
onerous
onerous
Groups of contracts are established at initial recognition and are not reassessed.
[IFRS 17.24]. An entity is permitted, but not required to subdivide contracts into further
groups based on information from its internal reporting, if that information meets
certain criteria. [IFRS 17.21].
An entity is prohibited from grouping contracts issued more than one year apart (except in
certain circumstances when applying IFRS 17 for the first time – see 17.3 and 17.4 below).
Current practices applied under IFRS 4 for recognising losses from onerous contracts
are likely to be based on wider groupings of contracts than those in IFRS 17. For
example, liability adequacy tests are often applied at product or legal entity level. We
believe the level of aggregation requirements under IFRS 17 will lead to a more granular
grouping and, as such, the requirements under IFRS 17 are likely to result in earlier
identification of losses compared to current reporting under IFRS 4.
5.1 Identifying
portfolios
A portfolio comprises contracts that are subject to similar risks and managed together.
Contracts have similar risks if the entity expects their cash flows will respond similarly
in amount and timing to changes in key assumptions. Contra
cts within a product line
would be expected to have similar risks and, thus, would be in the same portfolio if they
are managed together. Contracts in different product lines (for example, single premium
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fixed annuities as opposed to regular-term life assurance) would not be expected to
have similar risks and would be in different portfolios. [IFRS 17.14].
Deciding which contracts have ‘similar risks’ will be a matter of judgement. Many
insurance products provide a basic level of insurance cover with optional ‘add-ons’ (or
‘riders’) at the discretion of the policyholder. For example, a home contents insurance
policy may provide legal costs protection or additional accidental damage cover at the
policyholder’s discretion in return for additional premiums. The question therefore arises
as to the point at which policies of a similar basic type have been tailored to the level at
which the risks have become dissimilar. Riders that are issued and priced separately from
the host insurance contract may need to be accounted for as separate contracts.
5.1.1
Separation of insurance components within an insurance contract
Insurers may combine different types of products or coverages that have different risks
into one insurance contract. Examples include a contract that includes both life
insurance and motor insurance and a contract that includes both pet insurance and
home insurance. In some situations, separation of a single insurance contract into
separate risk components may be required for regulatory reporting purposes. Although
IFRS 17 provides guidance on separating non-insurance components within an
insurance contract (see 4 above) the standard is silent as to whether an insurance
contract can be separated into different insurance components (i.e. allocated to
different portfolios for aggregation purposes) and, if so, the basis for such a separation.1
This issue was discussed at the February 2018 meeting of the TRG. The TRG members
discussed the analysis of an IASB staff paper and observed that:
• the lowest unit of account that is used in IFRS 17 is the contract that includes all
insurance components;
• entities would usually design contracts in a way that reflects their substance.
Therefore a contract with the legal form of a single contract would generally be
considered a single contract in substance. However:
• there might be circumstances where the legal form of a single contract would
not reflect the substance of its contractual rights and obligations; and
• overriding the contract unit of account presumption by separating insurance
components of a single insurance contract involves significant judgement and
careful consideration of all relevant facts and circumstances. It is not an
accounting policy choice.
• combining different types of products or coverages that have different risks into
one legal insurance contract is not, in itself, sufficient to conclude that the legal
form of the contract does not reflect the substance of its contractual rights and
obligations. Similarly, the availability of information to separate cash flows for
different risks is not, in itself, sufficient to conclude that the contract does not
reflect the substance of its contractual rights and obligations;
• the fact that a reinsurance contract held provides cover for underlying contracts
that are included in different groups is not, in itself, sufficient to conclude that
accounting for the reinsurance contract held as a single contract does not reflect
the substance of its contractual rights and obligations.
Insurance contracts (IFRS 17) 4465
The TRG members also observed that considerations that might be relevant in the
assessment of whether the legal form of a single contract reflects the substance of its
contractual rights and contractual obligations include:
• interdependency between the different risks covered;
• whether components lapse together; and
• whether components can be priced and sold separately.
The TRG members considered that an example of when it may be appropriate to
override the presumption that a single legal contract is the lowest unit of account is
when more than one type of insurance cover is included in one legal contract solely for
the administrative convenience of the policyholder and the price is simply the aggregate
of the standalone prices for the different insurance covers provided.2
5.1.2
Combining insurance contracts
The inverse situation of separating components of insurance contracts (see 5.1.1 above)
is consideration as to when insurance contracts might need to be combined.
This issue was discussed at the May 2018 meeting of the TRG. The TRG members
discussed the analysis of an IASB staff paper and observed that:
• a contract with the legal form of a single contract would generally be considered
on its own to be a single contract in substance. However, there may be
circumstances where a set or series of insurance contracts with the same or a
related counterparty reflect a single contract in substance;
• the fact that a set or series of insurance contracts with the same counterparty are
entered into at the same time is not, in itself, sufficient to conclude that they
achieve, or are designed to achieve, an overall commercial effect. Determining
whether it is necessary to treat a set or series of insurance contracts as a single
contract involves significant judgement and careful consideration of all relevant
facts and circumstances. No single factor is determinative in applying this
assessment.
• the following considerations might be relevant in assessing whether a set or series of
insurance contracts achieve, or are designed to achieve, an overall commercial effect:
• the rights and obligations are different when looked at together compared to
when looked at individually. For example, if the rights and obligations of one
contract negate the rights and obligations of another contract;
• the entity is unable to measure one contract without considering the other.
This may be the case where there is interdependency between the different
risks covered in each contract and the contracts lapse together. When cash
flows are interdependent, separating them can be arbitrary;
• the existence of a discount, in itself, does not mean that a set or series of contracts
achieve an overall commercial effect.
The TRG members also observed that the principles for combining insurance contracts
in paragraph 9 of IFRS 17 are consistent with the principles for separating insurance
components from a single contract, as discussed at the February 2018 meeting of the
TRG (see 5.1.1 above).
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5.2
Identifying groups according to expected profitability
A group of insurance contracts is the main unit of account which determines
measurement and presentation. Measurement of insurance contracts occurs at the
group level within each portfolio (see 7 below) and each portfolio, to the extent relevant,
will consist usually of a minimum of three separate groups. Insurance contracts are also
aggregated in the statement of financial positi
on at a group level (see 14 below).
However, an entity will typically enter into transactions for individual contracts, not
groups, and therefore IFRS 17 includes requirements that specify how to recognise
groups that include contracts issued in more than one reporting period (see 6 below)
and how to derecognise contracts from within a group (see 12.3 below). [IFRS 17.BC139].
The Board concluded that groups should be established on the basis of profitability in
order to avoid offsetting of profitable and unprofitable contracts because information
about onerous contracts provided useful information about an entity’s pricing decisions.
[IFRS 17.BC119].
Once groups are established at initial recognition an entity should not reassess the
composition of the groups subsequently. [IFRS 17.24]. A group of contracts should
comprise a single contract if that is the result of applying the requirements. [IFRS 17.23].
An entity need not determine the grouping of each contract individually. If an entity has
reasonable and supportable information to conclude that all contracts in a set of
contracts will be in the same group, it may perform the classification based on a
measurement of this set of contracts (‘top-down’). If the entity does not have such
reasonable and supportable information, it must determine the group to which contracts
belong by evaluating individual contracts (‘bottom-up’). [IFRS 17.17].
Dividing a portfolio into the three minimum groups on inception based on an assessment
of profitability will require judgement, using quantitative factors, qualitative factors or a
combination of such factors. For example, identifying (sets of) contracts that can be
grouped together could require some form of expected probability-weighted basis of
assessment as insurance contracts are measured on this basis (see 8 below).
Alternatively, it may be possible to do this assessment based on the characteristics of
the types of policyholders that are more or less prone to make claims than other types
of policyholders (e.g. based on age, gender, geographical location or occupation). This
assessment is therefore likely to represent a significant effort for insurers and is likely
to be different to any form of aggregation used previously under IFRS 4 when many
entities will not have performed aggregation at a level lower than portfolio.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 883
