SEPERATE OR MERGE??
SEPERATION
The insurance contract contains various items. Some are treated under IFRS 17 and some are not. The ones that are not should be 'seperated' i.e. they should be treated under other IFRS.
Steps an insurance company should follow to "seperate" non-IFRS 17 items
a. Determine if the contract contains an embedded derivative (i.e a derivative that is hidden in the contract) and determine how to account for it (usually fair value).
b. Seperate investment component (concerned with accepting deposits from the clients and paying them back the principal plus interest) IF they are distinct i.e seperately identifiable. IFRS 9 should be used to account for them.
c. Seperate promises to transfer non-insurance goods and services (this relates to revenue). These should be accounted for using IFRS 15.
AGGREGATION
Portfolios
IFRS 17 requires insurance companies to group insurance contracts that have similar risks and are managed together into portfolios.
Sub-division
The contract in a portfolio should be further divided into:
a. Onerous contracts i.e. cost of fulfiling/executing it> contract income
b. Contract that, when initially recognised, have no significant risk of becoming onerous.
c. Contract that don't fall into the first two groups.
Contracts issued more than 1 year apart can't be in the same group.
If the insurance contracts within a portfolio would fall into different groups only because law or regulation specifically constrains the entity's practical ability to set a different price or level of benefits for policyholders with different characteristics, theentity may include those contracts in the same group.
I'll explain this with a simple example.
Imagine XYZ insurance issues life assurance policies and that there are two policy holders, A and B. A is a smoker and an heavy drinker while B lead a healthy life.
Normally, the premium for A should be higher, but, due to legal restrictions, it has to charge both A and B the same premium.
The can make A's policy fall into the first group (onerous contracts) and B's to benin the second group.
In such a situation, IFRS 17 permits the insurance company to recognise the policies of both A and B in the second group.