IFRS17 discount rates: Solvency 2 techniques or an alternative approach?

Discount rates are usually seen as a technically challenging topic for insurers, especially given the impact they could have when valuing the time value of money and guarantees of long-term life insurance contracts. With the upcoming application of IFRS17 to insurance contracts, the measurement of insurance liabilities will be a key factor in determining the level of technical provisions and may influence the pattern of recognition of insurers’ IFRS17 profits.

In Europe, while Solvency 2 sets very clear guidelines regarding discounting, long debates and discussions have nonetheless taken place around the effect of long-term guaranteed measures (for example in the European Commission’s review of the Directives, as presented in the last consultation paper issued by EIOPA).

For IFRS17, the Standard describes general principles rather than rules for discounting, leaving various possibilities for insurers to consider.

This paper presents the principle-based IFRS17 requirements regarding discounting and assesses the possibility of using the Solvency 2 prescribed techniques for IFRS17, especially when considering volatility adjustment as a measurement for the liquidity risk for liabilities. Alternative approaches are offered to estimate the liquidity premium when applying the bottom-up approach, based on the characteristics of the relevant insurance contracts