Annual cohorts and level of aggregation (IFRS 17)
IFRS 17 rule that bars putting contracts issued more than a year apart in the same group; the European Union lets certain contracts pooled across generations depart from it.
A life insurer has savings contracts written in 1998, in 2008 and in 2023, sharing a single euro fund whose return is pooled. IFRS 17, at paragraph 22, asks it to sort them by portfolio, then by profitability level, then by one-year cohort: no group contains contracts issued more than twelve months apart. The logic is simple, a group must show a coherent margin, and each generation's result must be readable. It clashes with the practice of with-profits euro savings, where generations are pooled: older, more profitable contracts partly pay for newer ones, the return served depending on the whole fund. Regulation (EU) 2021/2036, which endorses the standard, therefore provides an option: for groups of contracts with intergenerational risk pooling and matched cash flows, the entity may not apply the annual cohort requirement. The measure, known as the European carve-out, has been criticized, notably for comparability, and entities using it have to say so in the notes. The choice changes the CSM, which is no longer spread by year but by large group of contracts, and sharply cuts the number of groups to track. Non-life insurers, whose contracts last a year, are little affected.
EUR 30bn euro fund with contracts from 1995 to 2025. With annual cohorts, thirty-one generations, to be multiplied by portfolios and profitability levels, each group with its own CSM and possible loss component: several hundred groups. With the European exemption, one group per pooled portfolio and profitability level. A recent loss-making contract is then no longer isolated: its loss is offset within the group by the older ones' margins, and the loss component does not appear.
annual cohorts, IFRS 17 annual cohort requirement, level of aggregation IFRS 17, groups of insurance contracts, EU carve-out IFRS 17, intergenerational risk pooling exemption
Follow the research
One letter a week. First, the week's underwriting note, when one is published: a dated, argued decision, signed by Paul Bernardski. Then what the observatory published on cyber risk, political risk and insurance. No account, no tracking.
No spam, one-click unsubscribe, no data ever sold.