Level of Aggregation
In topic 4, the focus is on categorizing insurance types, specifically regarding the portfolio management under TFRS 17. The key requirement is that portfolios must be managed together and exhibit similar risk nature, such as short-term versus long-term durations, which should be distinctly separated.
Often, we observe that in other reporting frameworks, such as RBC in some countries, insurance types are grouped together based solely on "Manage Together" criteria without considering "Similar Risk Nature." This distinction highlights how TFRS 17 differs from RBC.
In practical terms, when categorizing insurance types under RBC versus TFRS 17, they should ideally align or at least TFRS 17, being a newer standard with extensive data requirements, should consider aligning its classification with RBC. This alignment would benefit database management and reduce undue operational burdens on the insurance sector.
A notable observation in the insurance industry is that classes such as Marine, Fire, and Engineering can span both short-term and long-term liabilities. However, under current RBC guidelines, these classes are categorized strictly under short-term liabilities. This simplifies calculations. TFRS 17 could similarly adopt
the principle of grouping classes according to RBC to streamline processes. For example, currently, insurance portfolios in the non-life insurance sector are grouped into 15 classes under RBC, and TFRS 17 could feasibly organize them into 15 portfolios following these classes.
The critical aspect is that each company must clearly explain whether each group Portfolio is managed together and possesses a similar risk nature or not.
In terms of financial reporting, for each Portfolio, we refer to it as the Unit of Account of Presentation. Ultimately, this resembles creating a mini financial statement consisting of Profit & Loss (P&L) and Balance Sheet for each Portfolio. However, we refrain from calling it a full Financial Statement. The complexity lies in that smaller companies may not have previously engaged in this type of reporting. To do so, they would need to establish income versus expenses and derive a bottom-line profit for each Portfolio.
Another detailed aspect of each Portfolio is what we call Cohort and Profitability, which can be analyzed together. We refer to this as the Unit of Account of Measurement.
The challenge lies in the past ability to assess how profitable a company would be based on its Portfolios, either collectively or individually. However, under TFRS 17, each insurance type must undergo testing before sale to determine whether the type to be sold will be profitable or not. If not profitable, it will be termed "Onerous" (as discussed later). This means TFRS 17 mandates detailed pricing and Profitability Tests for each type before sale. This is a significant issue that insurance companies in Thailand will need to seriously address, focusing more on Product Level (rather than just setting prices according to tariffs and selling them).
In TFRS 17, for grouping Cohorts, insurers have the option to consider either Underwriting Year or Policy Year. Typically, non-life insurers opt for Underwriting Year because they need to track transactions for Cohort grouping. Conversely, life insurance businesses often choose Policy Year for Cohort grouping.
Written by Master Tommy (Pichet)
FSA, FIA, FRM, FSAT, MBA, MScFE (Hons), B.Eng (Hons)
All rights reserved for the content of this article. Do not use it for any commercial gain. In addition to receiving permission from ABS company only.
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