2023 is a very important year for the insurance industry: The complex IFRS 17 framework was set in force on 1st January 2023 and replaces the interim standard IFRS 4 Phase I, which has been in force since 2005. The new standard regulates the principles for identification, recognition, measurement, presentation and disclosures for insurance contracts.
Alma is going to accompany the implementation of IFRS 17 by the insurance industry. Therefore, Alma will publish from time to time brief and well understandable articles on IFRS 17.
Part 6: Unit of Accounts (UoA)
The evaluation of insurance contracts depends not only on the method and the parameters, but also on the grouping of insurance contracts – or “solidarities”: Which insurance contracts are treated together with others in a group is an essential matter for the evaluation of a portfolio, because here “good” rated ones come together with “bad” rated ones in a group or “solidarity” or not.
Ad 1: Contract Combination
First of all, issues need to be addressed whether there are contract combinations or components to be separated. See also “Part 5: “How to start IFRS 17?” bullit 2 and 3.
Ad 2: IFRS 17 Portfolios
Next, contracts should be grouped into portfolios that have similar risk and are managed together.
Ad 3: Profitability Assessment
Within a portfolio, the following three groups of insurance contracts must be identified:
- Onerous contracts
- Insurance contracts for which there is no significant probability of becoming onerous
- Other contracts
Ad 4: Annual Cohorts
The portfolios are to be split according to annual cohorts (issued within one year).