Investment component (IFRS 17)
The amount a contract requires to be repaid to the policyholder whatever happens: excluded from IFRS 17 insurance revenue and claims expense, which sharply reduces revenue on savings contracts.
A life insurer collects EUR 100 million of premiums on savings contracts with a death cover, and under the old standards its annual revenue shows EUR 100 million. Under IFRS 17, the figure drops at a stroke, by most of the premiums. The reason lies in the definition of the investment component, in Appendix A of the standard: the amounts a contract requires to be repaid to the policyholder in all circumstances, whether or not an insured event occurs. The surrender value of a savings contract is the standard example. Paragraph 85 forbids including them in insurance revenue and in service expenses: neither the premium received for it nor the benefit paid back is revenue. There are two cases. A distinct component, separable from the rest of the contract and one that could be sold alone, is split off and measured under IFRS 9, with a deposit treated as a financial instrument. A non-distinct component stays in the contract's measurement, but enters neither revenue nor expenses. The effect is large for savings life insurance: premiums collected remain an indicator of inflows, while insurance revenue measures what the insurer earns for its service, risk and management. Growth comparisons between insurers must lean on that second figure, or on cash flows, and no longer on premiums.
Savings contract with a death benefit. Single premium of EUR 100,000. On surrender or death, the insurer pays at least the savings value, 100,000 plus interest; on death, it adds EUR 10,000 of sum at risk. The investment component is the savings, paid in all circumstances. Insurance revenue includes only the part paying for the EUR 10,000 sum at risk, management and margin, of the order of a few thousand euros a year, and not the 100,000 of premium.
investment component, IFRS 17 investment component, non-distinct investment component, distinct investment component, amount repayable in all circumstances
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