IFRS 17 Portfolios: What Does 'Similar Risks & Managed Together' Really Mean?

IFRS 17 requires insurers to aggregate contracts into specific groups before measuring them. The very first step in this process is defining a 'portfolio'. The standard defines a portfolio as a group of contracts that are 'subject to similar risks and managed together.' While this sounds straightforward, the practical application requires careful judgment. Let's break down what these two critical components really mean.

The First Test: 'Subject to Similar Risks'

This part of the definition is less about the level of risk and more about the type of risk. Think of it as the fundamental nature of the promise made to the policyholder. For example, all motor insurance contracts, whether for a high-performance sports car or a reliable family minivan, are subject to similar risks like accidents, theft, and third-party liability. They are exposed to the same kind of uncertainties.

In contrast, a life insurance contract is subject to mortality and longevity risks, which are fundamentally different from motor risks. You would never group motor and life contracts into the same portfolio because their underlying risks are not similar. This assessment often aligns cleanly with an insurer's existing lines of business (e.g., property, casualty, life, health).

The Second Test: 'Managed Together'

This is where business operations meet accounting. This condition requires you to look at how you actually run your business. Contracts are 'managed together' if you treat them as a single pool for key activities like underwriting, pricing, claims management, and assessing profitability.

To determine this, ask your team: Do these contracts fall under a single product manager? Are pricing and underwriting strategies set for the group as a whole? Do our management reports review the performance of these contracts as a collective unit? The answers to these operational questions will guide your accounting conclusion.

For instance, an insurer might offer travel insurance through both a direct online channel and a corporate partnership channel. If these channels have different pricing structures, separate profitability analyses, and are overseen by different management teams, they may not be 'managed together'—even though they cover similar travel-related risks. In this case, they would likely form two distinct portfolios.

Why This Two-Part Definition Matters

The portfolio is the highest level of aggregation under IFRS 17, and it sets a crucial boundary. A key principle of the standard is that you cannot offset a loss from an onerous contract in one portfolio with a profit from a contract in a different portfolio. Therefore, how you define your portfolios directly impacts the identification of loss-making contract groups and, ultimately, your recognized profit and loss.

Defining a portfolio isn't just a box-ticking exercise. It's a reflection of your business strategy. The two-part test—similar risks and managed together—ensures that the accounting aligns with how the business is actually run, providing a more transparent and faithful representation of your performance. Getting this foundational step right is crucial for a smooth and meaningful IFRS 17 implementation.