Insurance finance income or expenses (IFRS 17, OCI option)
The change in the insurance liability due to the time value of money and financial assumptions; the OCI option puts the rate-driven part in other comprehensive income instead of profit.
In 2022, interest rates rise by two points. A life insurance liability of 1,000 with a duration of twelve years loses about 240 of discounted value. Where does that gain go? Under IFRS 17 it belongs to insurance finance income or expenses, defined in paragraphs 87 to 92: the change in the carrying amount of a group of contracts arising from the time value of money and financial risk. If nothing else is provided for, everything goes through profit, and profit jumps when rates rise, without the insurer having earned anything more. Hence the paragraph 88 option, a method choice by portfolio: to split between profit or loss and other comprehensive income (OCI). For contracts whose cash flows do not depend on asset returns, profit or loss keeps a charge computed at the discount rate locked in at inception (the rate at the time of writing), and the difference with the current value goes to OCI. For contracts with direct participation, it is the period's book yield on underlying items that drives. The option serves to bring the liability's treatment closer to that of bonds the insurer holds at fair value through OCI under IFRS 9. It thus acts as an implicit accounting hedge between asset and liability, and its choice is one of the first things analysts look for in the notes.
Annuity book: liability of 1,000, duration 12 years, discount rate at inception 2%, current rate at year-end 4%. Value change due to rates: about −240. Without the OCI option, financial result of +240 in profit, while the matching bonds, measured at fair value through OCI, have lost roughly the same amount in equity: profit swells, equity barely moves. With the OCI option, the charge at the locked-in 2% goes to profit (about −20 of interest), the 240 go to OCI against the −240 on the asset side.
insurance finance income or expenses, IFIE, IFRS 17 OCI option, locked-in discount rate, disaggregation of insurance finance income, unwinding IFRS 17
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