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Risk Neutral Measurement

Risk Neutral Measurement In this article, I will discuss whether risk-neutral measurement should be allowed in the IFRS 17 final standard. It is known that IFRS 17 requires splitting cash flows based on their Asset-dependency. According to B74[1]: Estimates of discount rates shall be consistent with other estimates used to measure insurance contracts to avoid double counting or omissions; for example: (a) Cash flows that do not vary based on the returns on any underlying items shall be discounted at rates that do not reflect any such variability; (b) Cash flows that vary based on the returns on any financial underlying items shall be: i. Discounted using rates that reflect that variability; or ii. Adjusted for the effect of that variability and discounted at a rate that reflects the adjustment made. We believe that B77 is the elaboration for B74 (b) (ii) mentioned above in response to industries' backlash on cash flow splitting. According to B77[2]: IFRS 17 does not require an e...
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Asset Dependency Discounting

Asset Dependency Discounting In this article, I would discuss about the "Asset dependency discounting" issue in the IFRS 17 final standard. According to paragraph B74: Estimates of discount rates shall be consistent with other estimates used to measure insurance contracts to avoid double counting or omissions; for example: (a) Cash flows that do not vary based on the returns on any underlying items shall be discounted at rates that do not reflect any such variability; (b) Cash flows that vary based on the returns on any financial underlying items shall be: i. Discounted using rates that reflect that variability; or ii. Adjusted for the effect of that variability and discounted at a rate that reflects the adjustment made. A first grant in the standard seems to be obvious. Discount asset dependent cash flows (ADCF) by risk discount rate, and discount non-asset dependent cash flows (NADCF) by risk free rate. In...
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Investment Component

Investment Component In this article, I would discuss a long debated topic since 2013 ED, the investment component. The IASB thinks that, without investment component, the standard would not faithfully represents the similarities between financial instruments within the scope of IFRS 9 and investment component embedded in insurance contracts within the scope of IFRS 17.[1] To understand the calculation and eventually the controversial part of investment component, let's start with the definition in the standard first: The amounts that an insurance contract requires the entity to repay to a policyholder even if an insured event does not occur[2] To better understand the issue, we shall start with an illustrative example. Assume a single pay insurance contract with $10,000 payable upon death and maturity. Surrender value is linearly interpolated between years. Interest expense is 3% and actual investment return is 4%. Mortality is assumed level 0.5% and lapse rate level 1%. Premium ...
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