Financing Component
Under special considerations when duration is 0, could you explain why duration is 0 when there IS a significant financing component? I would have assumed that duration is 0 when there IS NOT a significant financing component as in this case LRC would be undiscounted and therefore wouldn't be interest rate sensitive.
The source mentions this "If insurance contracts in a group have a significant financing component, then the
carrying amount of the LRC (or ARC) is adjusted to reflect the time value of money
and the effect of financial risk using a discount rate determined on initial recognition."
Does this mean that when we have a significant financing component the discount rate used will be the rate in effect at initial recognition and wont change at subsequent measurement? Thus there is no interest rate sensitivity
Comments
The paper does not explain why this is the case. My guess is this is either because the interest rate is fixed at initial recognition or because the impact of discounting is negligible. I think the former is more likely, and that is in line with your conclusion