Document ID: chunk:federal_register_of_legislation:F2023L00015:reg:21:p86
Version: federal_register_of_legislation:F2023L00015
Segment Type: reg
Provision Reference: reg 21 (pt 86/101)
Character Range: 269141–272254

year.

     BC280        The Boards noted that, under AASB 17/PBE IFRS 17, essentially the same notions of discounting and inflating cash flows apply, but that the discount rate relates to a current time value of money and the liquidity characteristics of the insurance contracts. That is, all other things being equal, the discount rates under AASB 17/PBE IFRS 17 would be expected to be higher than under AASB 1023/PBE IFRS 4 due to the adjustment for illiquidity.

     BC281        The Boards noted the various sources of guidance and requirements (outside the Standards) for determining discount rates and inflation rates, including:

          (a) Australian and New Zealand actuarial guidance on valuation of general insurance claims;

          (b) Australian Prudential Regulation Authority prudential requirements on insurance liability valuation;

          (c) the risk-free discount rates and consumer price index (CPI) assumptions published by the New Zealand Treasury that must be used for the purpose of preparing the financial statements of government reporting entities submitting valuations to Treasury for measuring insurance claims liabilities under PBE IFRS 4.

     BC282        The Boards noted that, in respect of discount rates, all the various sources of guidance have a common starting point of sovereign bond yields for durations that match the relevant claims liabilities, with extrapolation when needed.

Illiquidity premium

     BC283        The Boards observed that, in concept, the size of an illiquidity premium would be positively correlated with:

          (a) the length of time over which claims (cash flows) are expected to be paid; and

          (b) the predictability of the cash flows.

     Accordingly, the longer the time to expected settlement and the more predictable are the cash flows, the less liquid is the liability and the larger is the illiquidity premium.

     BC284        The Boards noted that, in general, private sector insurers have yet to settle on their approach to determining an illiquidity premium under AASB 17/PBE IFRS 17 and that there are, as yet, no readily-available and widely-accepted benchmarks that can be applied. However, the Boards expect that an industry practice will emerge that public sector entities could apply.

     BC285        The Boards considered whether there might be a need for public sector specific guidance on determining an illiquidity premium, but concluded that the issues for public sector entities are no different from those that need to be addressed by other entities applying AASB 17/PBE IFRS 17.

Investment rates of return and discount rate volatility

     BC286        The Boards noted that:

          (a) most public sector entities set premiums/levies with a view to breaking even, after taking into account any relevant projected investment earnings; and

          (b) the rate of projected investment returns assumed is typically above the time value of money rate applied to measure liabilities for incurred claims.

     Accordingly, public sector entities ordinarily recognise unexpired risk