Grouping contracts based on similarities - Sample 8 part b
I was reviewing IFRS 17 Sample 8 part b and it asks us to combine contracts into the fewest number of groupings possible. The sample solution used LOB, Onerosity of contracts, and contract cover coverage period to determine these groupings.
While the first two are intuitive to understand, I am not sure how the solution is able to infer that group 1 (contract coverage period of 12 months) and group 2 (contract coverage period of 18) can be combined simply because they do not have coverage difference of more than 1 year. As an example if all contracts in group 1 are effective Jan 1 2022 they will expire Dec 31 2022 but group 2 could commence on June 1 2023 for example which means you would have contracts > 12 months apart. Is there another key piece of information I am missing in the question?
Also why can't we use PAA eligibility to determine which groups can be combined together? For example if there are 2 groups that are almost identical but one is deemed to be PAA eligible (through qualitative assessment) but the other is not, couldn't we argue they must be kept separate because they are measured differently?
Comments
No, the solution provided is incorrect. You cannot have contracts issued more than one year apart in a group. You are right.
For your second point, no this is not necessarily true. You can combine a group of contract that is PAA eligible and one that is not, as long as you measure them both using GMA. It might make sense to do this if they consists of similar risks. Remember, being PAA-eligible doesn't mean you HAVE to use PAA