In order to identify insurance contracts and inward reinsurance contracts that are within the scope of IFRS 17, the PZU Group verifies whether, under a given contract, the entity accepts a significant insurance risk from the policyholder and undertakes to compensate the policyholder for an adverse effect defined as an uncertain future insurable event.
For measurement purposes, insurance contracts are aggregated into so-called groups of insurance contracts. The purpose of this aggregation is to ensure that profits are recognized over time in proportion to the insurance services provided, and losses are recognized immediately when the entity assesses that the concluded contract is onerous. Offsetting profits and losses between the identified groups of insurance contracts is not allowed. Insurance contracts are grouped on initial recognition and in accordance with IFRS 17 the PZU Group does not reassess the groups in subsequent periods, unless there are grounds for derecognition as set forth in IFRS 17 , related to the modification of the insurance contract, causing a new contract to be
recognized. Insurance contracts are aggregated into groups of insurance contracts, taking into consideration the following three levels:
- portfolio – contracts with similar risk characterization, managed jointly;
- profitability – contracts belonging to the same profitability group – one of the three defined by IFRS 17:
- groups of onerous contracts at initial recognition;
- groups of contracts that at initial recognition have no significant possibility of becoming onerous subsequently;
- groups of other contracts belonging to the portfolio,
- cohort – contracts issued no more than one year apart.
In the PZU Group, the division of the portfolio into groups of insurance contracts accounts for the aforementioned levels in the following manner:
- in terms of a portfolio:
- based on the risk characterization of individual insurance contracts and based on existing insurance portfolio management processes;
- in terms of profitability:
- for life insurance – at the level of a single contract, through the measurement of the said insurance contract;
- for non-life insurance – all contracts are treated as profitable, unless facts or circumstances indicate that they are not profitable. Profitability is assessed at the level of the IFRS 17 portfolio, whereas assessment may be moved to the level of the cohort for the given quarter or year;
- in terms of a cohort:
- it has been decided to group life insurance into annual cohorts and non-life insurance into quarterly cohorts, which allows a more accurate allocation of insurance contracts to profitability for the purposes of measuring liabilities.
An insurance contract may contain one or more components that would be within the scope of another IFRS if they were separate contracts. The analysis allows the PZU Group to find that it does not offer products with components constituting separate contracts which would be within the scope of another IFRS.