Level of Aggregation in IFRS 17 (Massimiliano Neri)
Level of Aggregation in IFRS 17 (Massimiliano Neri)
IFRS 17 requires entities to identify portfolios of insurance contracts, which comprise contracts that are subject to similar risks and are managed together. Massimiliano Neri provides insights from his current white paper publication about the "Level of Aggregation".
Transcript: There are accounting standards, like IFRS 9, IFRS 15 that operate major financials at their contract level. IFRS 17 is different. The IASB has recognized that insurance companies basically sell groups of similar insurance contracts to pull risk. Therefore, the concept of grouping is important in order to recognize the revenue for insurance companies. That’s why they have this requirement about groups of contracts or also called in the standard, level of aggregation. This is fundamental, because the level of aggregation determines the the unit of account. To give an example, the granularity that you use for a group of contracts will determine if this group of contracts will be profitable or unprofitable in the terminology of the standard: onerous. This is an important decision that you have to take. At what level of granularity do you want to operate? More specifically, at what level of aggregation do you want to have your fulfillment cash flows or CSM calculations? There is an industry debate about that. On one side, there is a school of thoughts that defends the idea of having the finest granularity. This brings us data that is more accurate, you can extract trend information but on the other side, the operational costs to implement projects at this level of granularity is very important. We have collected information about this debate. Read about it in our whitepaper on moodysanalytics.com.
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