Level of Aggregation

Study guide: Exam 6C

Level of Aggregation is the IFRS 17 requirement that contracts be measured in groups, not individually and not as a whole book. Contracts are first divided into portfolios (similar risks, managed together), then each portfolio is split by annual cohort (contracts issued no more than twelve months apart), and each cohort is split by profitability at initial recognition.

\text{Group} = \text{Portfolio} \; \cap \; \text{Annual cohort} \; \cap \; \text{Profitability bucket}

• The three profitability buckets: contracts that are onerous at initial recognition; contracts with no significant possibility of becoming onerous subsequently; and everything else. Assessment is at initial recognition and the grouping is never reassessed afterwards.
• The annual cohort requirement prevents an insurer from mixing new profitable business with older unprofitable business to conceal the latter. It is the single most contested requirement in IFRS 17 and was the subject of an EU carve-out for some contracts — Canada applies it in full.
• Why it matters so much: the onerous test is applied per group. Profitable business cannot offset unprofitable business across groups, so losses surface that would have been invisible under a portfolio-wide premium deficiency test.
• Practical effect for P&C insurers. The number of groups multiplies quickly — line by province by cohort by profitability bucket — which drives system complexity, and it makes the choice of portfolio definition consequential: a broadly drawn portfolio permits more offsetting within groups, a narrowly drawn one surfaces more losses.
• The floor, not the ceiling. IFRS 17 sets a minimum granularity; an insurer may disaggregate further, and some do for management reporting. It may not aggregate more coarsely.
• Contracts within a group are measured together for the CSM, the Loss Component, and the onerous assessment — but the LIC can in practice be estimated at a coarser level and allocated, since claims already incurred carry no CSM.

How Many Groups? An insurer writes personal automobile in Ontario and Alberta, and commercial property in Ontario. Within personal auto Ontario, one subset of business written in the year is expected to be onerous. All contracts are annual and written throughout the year.

Determine the minimum number of groups for the year, and explain what the requirement achieves.

Answer Portfolios — contracts with similar risks managed together. Personal auto Ontario, personal auto Alberta and commercial property Ontario are three distinct portfolios (an insurer could argue personal auto is one portfolio across provinces, but the different regulatory and benefit regimes make separate portfolios the better view, and it is the one a regulator will expect).

Cohort — one, since all contracts are written within the year.

Profitability — personal auto Ontario splits into at least two groups (onerous, and the rest); the other two portfolios have one each, assuming no onerous business.

\text{Minimum groups} = 2 + 1 + 1 = 4

What it achieves. Suppose personal auto Ontario is expected to produce a \$6 million loss on the onerous subset and a \$20 million profit on the rest. Under a portfolio-level test, the portfolio is profitable and no loss is recognised. Under IFRS 17, the onerous group's \$6 million loss is recognised immediately as a Loss Component, while the profitable group's \$20 million emerges over the coverage period.

That asymmetry — losses now, profits later — is the intended outcome, and it is why the annual cohort requirement matters: without it, next year's profitable business could be pooled with this year's losses and the loss would never appear at all.