Investment Components

Non-distinct investment components are subject to IFRS 17 reporting. This course introduces the concept of a non-distinct investment component. It also covers typical investment components contained in Canadian insurance contracts and their accounting treatment.

Investment Components

IFRS 17 Appendix A Definition:

“The amount that an insurance contract requires the entity to repay to a policyholder even if an insured event does not occur”

Difference between “Distinct” and “Non-Distinct” investment components

Distinct Investment Components

An investment contract is distinct if, and only if, both of the following conditions are met:

  1. The investment component and the insurance component are not highly interrelated;
  2. A contract with equivalent terms is sold, or could be sold, separately in the same market or the same jurisdiction, either by entities that issue insurance contracts or by other parties.

Non-Distinct Investment Components

An investment contract and insurance contract are highly interrelated if, and only if:

  1. The entity is unable to measure one component without considering the other.
  2. The policyholder is unable to benefit from one component unless the other is also present.
  • Projected cash flows under IFRS 17 should include the non-distinct investment components
  • The non-distinct investment components should be excluded from Insurance Revenue and Insurance Service Expenses
  • Requires splitting actual and expected payments between the insured event amount (i.e. death claim) and the investment component (i.e. CSV)

Examples of Investment Components in Canadian Contracts

Contract Feature Investment Component? Distinct? Accounting Treatment
Cash Surrender Value (CSV) Yes No Include in Fulfilment Cash Flows (FCF). Exclude from Insurance Revenue and Insurance Service Expense. Reduce Death Benefit by Implicit CSV in Insurance Service Expense.
Endowment Benefit Yes No Include in FCF. Exclude from Insurance Revenue and Insurance Service Expense.
Policy Loans No N/A Include in FCF. Exclude from Insurance Revenue and Insurance Service Expense. Report balance with insurance liabilities (negative) rather than as separate asset.
Contract Feature Investment Component? Distinct? Accounting Treatment
Return of Premium on Surrender (ROPS) or Expiry (ROPX) No N/A Include in FCF. Exclude from insurance revenue and insurance service expense (surrender is not an insured event)
Return of Premium on Death (ROPD) No N/A Include in FCF. Include in insurance revenue and insurance service expense (death is an insured event)
Account Value (less surrender charges) Yes N/A Include in FCF. Exclude from insurance revenue and insurance service expense.
Policyholder Share of the Underlying (VFA) Yes N/A Include in FCF. Exclude from insurance revenue and insurance service expense.
Experience Rating Yes, if paid in all circumstances N/A Same as “Policyholder Share of the Underlying (VFA)”. If there is no insurance risk (i.e. some hold harmless agreements), the contract would be outside the scope of IFRS 17
Contract Feature Investment Component? Distinct? Accounting Treatment
Amount on Deposit Yes Maybe If Distinct, would be separated from the insurance contract, measured under IFRS 9, liability included with other investment contract liabilities.

If Non-Distinct, IFRS 17 applies, liability included with insurance contract liabilities. Exclude from insurance revenue and insurance service expense.
Annuity Payments during the term certain period of life-contingent annuities Yes No Include in FCF. Exclude from insurance revenue and insurance service expense.
Contract Feature Investment Component? Distinct? Accounting Treatment
Prepaid Premium Account Yes Maybe

If distinct, separated from insurance contract, measured under IFRS 9, liability included with other investment contract liabilities.

If Non-Distinct, IFRS 17 applies, liability included with insurance contract liabilities. Exclude from insurance revenue and insurance service expense.
Contract Feature Investment Component? Distinct? Accounting Treatment
Claims Fluctuation Reserves Yes Maybe

If distinct, separated from insurance contract, measured under IFRS 9, liability included with other investment contract liabilities.

If Non-Distinct, IFRS 17 applies, liability included with insurance contract liabilities. Exclude from insurance revenue and insurance service expense.