The measurement of an insurance contract covers solely the cash flows that are within the contract boundary. The contract boundary separates future cash flows related to existing insurance contracts from cash flows related to insurance contracts yet to be concluded.
The PZU Group sets the contract boundary when the PZU Group cannot compel the policyholder to pay the premiums or when the PZU Group has a substantive obligation to provide the policyholder with insurance contract services. The substantive obligation ends when:
- the entity has the practical ability to reassess the risks of the particular policyholder and, as a result, can set a price or level of benefits that fully reflects those risks (individual policyholder assessment); or
- both of the following criteria are satisfied:
- the entity has the practical ability to reassess the risks of the portfolio of insurance contracts that contains the contract and, as a result, can set a price or level of benefits that fully reflects the risk of that portfolio (portfolio assessment); and
- the pricing of the premiums up to the date when the risks are reassessed does not take into account the risks that relate to periods after the reassessment date.
In the PZU Group, the approach to the contract boundary, with few exceptions, is consistent with the end of the contract indicated in the insurance contract as a legal document. The exceptions are contract boundaries applied in life insurance riders. From a formal point of view, they are mostly renewable annual contracts. For the purpose of measurement in accordance with IFRS 17, riders are recognized and measured along with the host contracts, provided the assessment is not , that the rider constitutes a separate insurance contract and should therefore be separated from the host contract. Riders are modelled with account taken of renewals, and contract boundaries of riders correspond to the boundaries of host contracts. In case of unit-linked insurance, in products with regular premiums, for an IFRS 17 measurement, the contract boundary falls when the Group PZU no longer has a substantive obligation to provide the policyholder with insurance contract services, which in practice involves the recognition of all forecast cash flows in the future.