The amounts that an insurance contract requires the entity to repay to a policyholder even if an insured event does not occur.
An example of an investment component is an insurance contract where premiums are paid into an account balance and that balance (or a portion thereof) is guaranteed to be repaid to the policyholder on maturity or surrender of the contract, i.e., even if an insured event such as death does not occur (See example below).
IFRS 17 requires an entity to separate distinct investment components from the host insurance contract [IFRS 17 11]. An investment component is distinct if both of the following conditions are met [IFRS 17 B31]:
- The investment component and the insurance component are not highly interrelated.
- A contract with equivalent terms is sold, or could be sold, separately in the same market or the same jurisdiction, either by entities that issue insurance contracts or by other parties.
However, the entity should consider all information that is reasonably available.
An investment component and an insurance component are highly interrelated if [IFRS 17 B32]:
- The entity is unable to measure one component without considering the other. For example, if the value of one component varies according to the value of the other, an entity should apply IFRS 17 to account for the combined investment and insurance components.
- The policyholder is unable to benefit from one component unless the other is also present. For example, if the lapse or maturity of one component in a contract causes the lapse or maturity of the other, the entity should apply IFRS 17 to account for the combined investment and insurance components.
|INSURANCE CONTRACT WITH AN ACCOUNT BALANCE AND MINIMUM DEATH BENEFIT|
|Consider an insurance contract with an account balance that guarantees to pay at least a minimum benefit on the death of the policyholder regardless of the account balance1. The insurance cover and the right to receive that balance lapse together on termination of the contract.|
There is a minimum death benefit equal to the excess of the guaranteed amount over the account balance when a death occurs. An entity would not separate the investment component because it is highly interrelated with the insurance component for two reasons, as shown in this example:
Therefore, the entity accounts for the investment components under IFRS 17 as a non-distinct investment component.
Distinct investment components
Often, for contracts with death benefits, other components of the contract are settled on the death of the policyholder or when the contract lapses. If investment components cease to exist on death or lapse of the contract, the investment components are non-distinct from the life insurance component. Thus, they are not separated. Similarly, some property and casualty contracts contain experience refunds or no claims bonuses that are investment components but would be non-distinct if termination of the insurance contract results in termination of those components.
An investment component that is separated from the insurance contract is accounted for as a financial instrument within the scope of IFRS 9. An investment component that is non-distinct and is not separated from an insurance contract for the purpose of measurement should nevertheless be excluded from both insurance revenue and insurance service expenses.
Some insurance companies provide loans to policyholders secured on insurance policies for an amount up to the maximum of the account value of the policy. Currently, these loans are often accounted for and presented as financial assets.
Under IFRS 17, the accounting depends on whether the policyholder loan is required to be repaid on maturity or lapse of the insurance contract. If the policyholder cannot benefit from the policyholder loan unless the insurance contract is in force, the policyholder loan is a non-distinct component of the insurance contract and should be accounted for together with the insurance contract. This means that payments of interest and principal are future cash flows from the insurance contract. They are measured on a current probability-weighted basis and discounted using the same discount rate as all other cash flows from the insurance contract.
It is not permitted to present policyholder loans as assets on the balance sheet separately from other cash flows from the same contract.