Grouping Contracts at Initial Recognition According to Expected Profitability

Initial recognition of insurance contracts is the process of grouping the insurance contracts that are subject to similar risks. The initial recognition is performed at the beginning of the coverage period of the group of contracts (Policy Inception). During initial recognition, an insurance contract can be part of an existing group of insurance contracts if all the contracts have similarly expected profitability at the time of initial recognition and are issued within one year.

Note:

Insurance contracts that are issued more than one year apart should not be a part of the same group.

Once the initial recognition of a group of insurance contracts is completed, the carrying amount of the group at each reporting date is calculated as the sum of the liability for remaining coverage and the liability for incurred claims comprising the Fulfillment Cash Flows related to past service allocated to the group at that date.

The Liability for remaining coverage is comprised of the fulfillment cash flows allocated to the group at that date and the Contractual Service Margin (CSM) of the group at that date. CSM is the unearned profits recognized over the coverage period.

The requirements on when to recognize a group of reinsurance contracts held are different depending on whether the reinsurance contract held covers the losses of separate insurance contracts on a proportionate basis, proportionate reinsurance contracts, or the reinsurance contract held covers aggregate losses from underlying contracts over a specified amount, such as non-proportionate reinsurance contracts.

A group of proportionate reinsurance contracts held is recognized at the later of the beginning of the coverage period of the group or the initial recognition of any underlying insurance contract. This means an entity will not recognize a group of proportionate reinsurance contracts held until it has recognized at least one of the underlying insurance contracts. A group of non-proportionate reinsurance contracts held is recognized at the beginning of the coverage period of the group.