Insurance contract discount rates

The second element of measuring fulfilment cash flows under the general model is an adjustment to the estimates of future cash flows to reflect the time value of money and financial risks related to those cash flows (to the extent that they are not included in the cash flow estimates). The adjustment is made by discounting estimated future cash flows. Discount rates must [IFRS 17 36]: Insurance contract discount rates

  • Reflect the time value of money, characteristics of the cash flows and liquidity characteristics of the insurance contracts Insurance contract discount rates
  • Be consistent with observable current market prices (if any) for financial instruments with cash flows whose characteristics are consistent with those of the insurance contracts (e.g., timing, currency and liquidity) Insurance contract discount rates
  • Exclude the effect of factors that influence such observable market prices, but do not affect the future cash flows of the insurance contracts

Discount rates used to measure the present value of future cash flows should reflect the characteristics of the cash flows; for example, in terms of currency and timing of cash flows and uncertainty due to financial risk. The effects of uncertainty in cash flows due to non-financial risks are included in the risk adjustment for non-financial risk. Insurance contract discount rates

The discount rates calculated according to the requirements above should be determined, as follows [IFRS 17 B72]: Insurance contract discount rates

Insurance liability measurement componentDiscount rate

Fulfilment cash flows

Current rate at reporting date

Contractual service margin interest accretion for contracts without direct participation features

Rate at date of initial recognition of group

Changes in the contractual service margin for contracts without direct participation features

Rate at date of initial recognition of group

Changes in the contractual service margin for contracts with direct participation features

A rate consistent with that used for the allocation of finance income or expenses

Liability for remaining coverage under premium allocation approach

Rate at date of initial recognition of group

Profit or loss component

Disaggregated insurance finance income included in profit or loss for groups of contracts for which changes in financial risk do not have a significant effect on amounts paid to policyholders (see ‘Financial risks not effecting insurance payments’)

Rate at date of initial recognition of group

Disaggregated insurance finance income included in profit or loss for groups of contracts for which changes in financial risk assumptions have a significant effect on amounts paid to policyholders (see ‘Financial risks effecting insurance payments’)

Rate that allocates the remaining revised finance income or expense over the duration of the group at a constant rate or, for contracts that use a crediting rate, uses an allocation based on the amounts credited in the period and expected to be credited in future periods

Disaggregated insurance finance income included in profit or loss for groups of contracts applying the premium allocation approach (see ‘Financial risks effecting insurance payments’)

Rate at date of incurred claim

To determine the discount rates at the date of initial recognition of a group of contracts described above, an entity may use weighted-average discount rates over the period that contracts in the group are issued, which cannot exceed one year [IFRS 17 B73]. This can result in a change in the discount rates during the period of the contracts. When contracts are added to a group in a subsequent reporting period (because the period of the group spans two reporting periods) and discount rates are revised, an entity should apply the revised discount rates from the start of the reporting period in which the new contracts are added to the group [IFRS 17 28]. This means that there is no retrospective catch-up adjustment. Insurance contract discount rates

For insurance contracts with direct participation features, the contractual service margin is adjusted based on changes in the fair value of underlying items, which includes the impact of discount rate changes (see Contracts with discretionary participation features). Insurance contract discount rates

Further readings in this caption of IFRS 17:
Discount rates consistent with characteristics of cash flows
Current discount rates consistent with observable market prices
Discount rates – Bottom up or Top down approach
Discount rates – Beyond the market observable range

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