Embedded derivatives are to be separated following the rules of IFRS 9. Derivatives that can be contractually transferred independently, or have another counterparty, are not embedded, but separate contracts.
- The investment component is not highly interrelated with the insurance component; this means both that the entity is able to measure each component without considering the other components and policyholders can benefit from each component even if the other is not present (e.g., each component can lapse independently).
- The investment component appears after some reasonable research to be or could be, sold separately in the same market or jurisdiction.
This means for instance that components that necessarily expire together (in case of a death or lapse/cancellation) or that are available in other markets but could not be provided separately in the own market, in general, would not be separated.
Service components are to be separated in line with paragraph 7 of IFRS 15 but only after satisfying the requirements of paragraphs B33-35, in which case they are measured under IFRS 15, as modified by paragraph 12 of IFRS 17. To separate service components, fulfillment cash in-flows and outflows need to be attributed to either the insurance or service component, with a rational allocation for those cash flows that are not uniquely related to either of these two (see paragraph 12).
Disclosure of components
Insurers have currently often different components, such as claims liabilities to be settled, unearned premiums, receivables/payables, etc managed separately and administered in different systems. IFRS 17 leads to insurance receivables, policy loans and reinsurance collateral (funds withheld) no longer being separately visible on the balance sheet.
BC114 gives policy loans, assuming that they are a contractual feature, as an explicit example of a component highly interrelated with the rest of the contract and therefore not separable in a non-arbitrary way.