Duration = 0 for LRC
The CIA.Duration reading states that "if insurance contracts have a significant financing component, then ... LRC (or ARC) is adjusted to reflect the time value of money". Similarly, in the CIA.IFRS17 reading, page 13, "If the contract has a significant financing component, IFRS 17 requires the time value of money ...".
However, the CIA.Duration wiki states the follwing:
Special Considerations, when duration is 0:
- When claims are expected to be paid out within a year and the LIC and AIC is not discounted
- When there is a significant financing component
This to me reads like [significant financing component] -> [duration is 0] -> [no discounting required]. I guess you could interpret it as "we need to give special considerations when we assign a 0 duration, and when there is a significant financing component, we should not do that". This would reconcile my interpretations of the text and the wiki, but I feel it's a reach.
Please let me know which case it is. Thanks!
Comments
This following is from the duration source:
"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."
This is consistent with Section 8 locked in yield curves of the CIA Discount Rate for IFRS 17 source:
"Locked-in yield curves refer to yield curves determined either at the initial recognition of the group of contracts or at the date of incurred claims (refer to table in Section 1 for further details). Under IFRS 17, locked-in yield curves are used for three purposes:
• Adjusting and accreting interest on the CSM.
• Systematic allocation of insurance finance income or expense to the income statement
if the entity chooses to disaggregate the insurance finance income or expense between
profit and loss and other comprehensive income (OCI).
• The entity uses the PAA and there is a significant financing component, as defined in
IFRS 15 paragraphs 60–61."
The third bullet point is what we care about.
It appears that when there is a significant financing component and PAA is used LRC uses a locked-in yield curve determined at initial recognition.
I believe what happens is that LRC is rolled forward using the locked in yield curve so LRC is not interest rate sensitive. In other words there is no Insurance Finance Expense appearing on the P&L.
The CIA IFRS17 Discount Rate source further reads:
", if the entity elects the OCI option, the accumulated other
comprehensive income (AOCI) includes the difference between the fulfilment cash flows
calculated at current rates and the provision calculated at locked-in rates."
Therefore, rather than appearing on the P&L, the difference between locked in yield curves and discount curves based on the current environment appears on the statement of OCI (similar to what happens under the OCI option). So all the Insurance Finance Expense appears on the statement of OCI rather than on the P&L.
That's a really good and correct explanation