Section 01
Why Discount Rates Matter
Under IFRS 4, discounting was optional. Under IFRS 17, it is mandatory for all long-term insurance cash flows — making the choice of discount rate one of the most impactful actuarial judgements in financial reporting.
Impact 01
PVFCF Measurement
Current discount rates determine the present value of future cash flows. Higher rates reduce reported liabilities; lower rates increase them — directly affecting balance sheet size. Para 36
Impact 02
CSM Accretion at Locked-In Rate
The CSM accretes interest at the locked-in inception rate, not the current market rate. This isolates P&L profit recognition from subsequent market rate movements. Para B72
Impact 03
P&L vs OCI Election
Insurers elect whether insurance finance income/expenses flow through P&L or OCI. This accounting policy choice has material consequences for reported earnings volatility and equity presentation.
Impact 04
Liability Sensitivity to Rate Changes
Rate methodology and liquidity premium calibration have material consequences for reported liabilities and equity. Decisions here are among the most impactful actuarial judgements under IFRS 17.
IFRS 17 Para 36, Para B72 (IASB 2017/2023) · Shasat / Winkler & Kansal (2025/2026) · PSAK 117 effective 1 January 2025
Section 02
IFRS 17 Para 36: Three Requirements
"Discount rates shall include only relevant factors — i.e. factors that arise from the time value of money, the characteristics of the cash flows, and the liquidity characteristics of the insurance contracts."
— IFRS 17 Para 36 / IASB 2017–2023Requirement 1
Time Value & Liquidity
Rates must reflect the time value of money and the liquidity characteristics of the insurance liability — not the asset portfolio.
Requirement 2
Observable Market Prices
Consistent with current market prices for instruments with matching timing, currency, and liquidity characteristics.
Requirement 3
Exclude Credit Risk
Must exclude the effect of the insurer's own credit risk and any other factors that do not affect insurance contract cash flows.
Key implication: The discount rate reflects the liquidity of the insurance liability — not the insurer's asset portfolio or its own creditworthiness. (Para B78 · TRG AP2 Sept 2018)
IFRS 17 Para 36 · TRG AP2 (Sept 2018): top-down approach must eliminate credit risk and other non-relevant factors from asset yields
Section 03
Two Approaches: Top-Down vs Bottom-Up
IFRS 17 Para B80–B81 permits two approaches — both must converge to the same discount rate reflecting insurance contract liquidity.
↓ Top-Down · Para B80
Start from Asset Portfolio Yield
Dominant method globally — aligned with Solvency II Volatility Adjustment
- Reference Asset Portfolio Yield~5.5%
- − Credit Risk Premium−1.0%
- − Other Non-Relevant Factors−0.5%
- = Discount Rate~4.0%
↑ Bottom-Up · Para B81
Start from Liquid Risk-Free Rate
PSAK 117 default — SBN yield curve + OJK-capped illiquidity premium
- Liquid Risk-Free Yield Curve~3.5%
- + Illiquidity Premium+0.5%
- = Discount Rate~4.0%
Convergence Principle: Both approaches must arrive at the same rate → ~4.0% Discount Rate
Market Practice: Bottom-up dominant — 42% use EIOPA rate; 58% use higher rate
Market Practice: Bottom-up dominant — 42% use EIOPA rate; 58% use higher rate
IFRS 17 Para B80–B81 · TRG AP2 (Sept 2018) · Shasat / Winkler & Kansal (2025)
Section 04
The Illiquidity Premium
The illiquidity premium (IP) is the extra return investors demand for holding illiquid assets. Insurance liabilities are illiquid — policyholders cannot easily "sell" their policy — justifying an IP add-on to the risk-free rate.
Estimation Methods
Three common approaches: CDS Negative Basis — spread between CDS and bond yields; Covered Bond Spreads; and Structural Models (e.g., Bank of England model).
Product Variation — Life vs P&C
IP varies significantly by product: long-term life annuities 30–100 bps, reflecting high illiquidity; short-tail P&C contracts carry an IP near zero.
PSAK 117 OJK Cap
OJK guidance limits the illiquidity premium to ±0.5% of the risk-free rate for the bottom-up approach. Applies to Indonesia Government Securities (SBN) yield curve as the base.
Practical Challenges
Duration mismatches, currency mismatches, and liquidity premium estimation — all requiring careful actuarial judgment. (Shasat / Winkler & Kansal, 2025)
IFRS 17 Para B81 · PSAK 117 · OJK Actuarial Assumptions Guidance (Lampiran VI)
Section 05
Cash Flow Discounting with a Yield Curve
IFRS 17 Para 36 requires rates that reflect the timing characteristics of cash flows. A 1-year claim and a 30-year annuity have different time horizons — they must be discounted at different rates from the yield curve.
PVFCF Formula
PVFCF = Σ CFt / (1 + rt)t
Each year's net CF discounted at the rate matching its own tenor · Positive PVFCF = Net Liability
Worked example: 5-Year Endowment Life (per policy) · Risk-Free: SBN Yield Curve + 0.40% IP · Maturity Benefit: Rp 1,000,000 at Year 5
| Year | Inflow | Outflow | Net CF | SBN Rate | +IP | rt | DF | PV Net CF |
|---|---|---|---|---|---|---|---|---|
| Year 1 | 300,000 | 150,000 | −150,000 | 5.40% | +0.40% | 5.80% | 0.9452 | −141,780 |
| Year 2 | 300,000 | 150,000 | −150,000 | 5.65% | +0.40% | 6.05% | 0.8893 | −133,395 |
| Year 3 | 300,000 | 150,000 | −150,000 | 5.85% | +0.40% | 6.25% | 0.8319 | −124,785 |
| Year 4 | 300,000 | 150,000 | −150,000 | 6.00% | +0.40% | 6.40% | 0.7773 | −116,595 |
| Year 5 | 300,000 | 1,150,000 | +850,000 | 6.10% | +0.40% | 6.50% | 0.7299 | +620,415 |
| PVFCF | +Rp 103,860 |
⚠️ Onerous Contract: PVFCF > 0 means PV of outflows exceeds PV of inflows. Assuming RA = 0, CSM = −103,860 → negative → CSM = 0. Loss of Rp 103,860 recognised immediately in P&L at inception (Para 47–52).
Locked-In at Inception: This curve is locked in at initial recognition for CSM accretion (Para 44(b)). FCF is re-discounted at the current curve each period — the difference flows to OCI under Para 88.
IFRS 17 Para 36 · Each year's net CF discounted at the rate matching its own tenor · SBN yield curve + 0.40% IP (illustrative)
Section 06
OJK Guidance on Discount Rates
PSAK 117 (IFRS 17 Indonesia) — Actuarial Assumptions, Lampiran VI provides specific guidance for Indonesian insurers.
Default Method
Bottom-Up with SBN Yield Curve
Start with the Indonesia Government Securities (SBN/SUN) yield curve, computed as a weighted average matching the tenor of liability cohorts. Add or subtract the illiquidity premium (max ±0.5%) to arrive at the contract discount rate.
Exception
Top-Down for Distressed Insurers
Financially distressed insurers may apply the top-down approach, starting from the monthly investment yield of the actual asset portfolio. The illiquidity premium cap of ±0.5% still applies under this exception.
IP Cap
Cap: ±0.5% of Risk-Free Rate
OJK caps the illiquidity premium at plus or minus 0.5% for both bottom-up and top-down approaches. This reflects the liquidity characteristics of insurance contracts relative to the risk-free reference instruments used.
Reporting Mandate
Quarterly from Q1-2025
Quarterly financial statements under PSAK 117 are mandatory from Q1-2025, with the first submission due 15 May 2025. Implementation governed by POJK No. 22/2024 and SEOJK No. 23/SEOJK.05/2024.
OJK Actuarial Assumptions Guidance PSAK 117, Lampiran VI · POJK No. 22/2024 · SEOJK No. 23/SEOJK.05/2024 · Effective: 1 January 2025
Section 07
OCI Election: Managing P&L Volatility
IFRS 17 Para 88 allows insurers to elect whether insurance finance income/expenses flow through P&L or OCI. This is one of the most consequential accounting policy decisions under IFRS 17.
Without OCI Election — All Through P&L
Higher P&L Volatility
Changes in current discount rates flow directly to P&L — creating significant earnings volatility as market rates move each reporting period. Reported profits fluctuate with interest rate movements.
With OCI Election — Smoother P&L
P&L Reflects Locked-In Rate Only
P&L reflects only finance income/expense at the locked-in inception rate. The difference between current rate and locked-in rate is absorbed by OCI (equity), not P&L. Majority of global insurers elect OCI.
Natural hedge with IFRS 9: Asset fair value changes also flow to OCI under IFRS 9, offsetting liability OCI movements. Must be applied consistently by portfolio group and cannot be changed retrospectively.
IFRS 17 Para 88 · OCI Election · POJK 22/2024 · Majority of global insurers elect OCI to reduce P&L volatility
Section 08
Top-Down vs Bottom-Up: Decision Framework
A 5-step decision framework for Indonesian insurers under OJK POJK No. 22/2024.
1
Financial Health
Distressed insurer? Low investment yield → OJK directs Top-Down (asset yield ± IP ≤ 0.5%). Otherwise, proceed to Bottom-Up.
2
Product Type
Life (endowment/annuity) → Bottom-Up + IP up to 0.5%. Short-tail P&C → near-zero IP; consider PAA.
3
Risk-Free Curve
Construct using SBN (Indonesia Govt Securities) yield curve, weighted average by cohort tenor.
4
Illiquidity Premium
Set IP within OJK cap ±0.5%. Reflect product liquidity characteristics per IFRS 17 Para B80–B81.
5
OCI Election
Decide P&L vs OCI policy for insurance finance income/expenses. Document and apply consistently (Para 88).
PSAK 117 Default Approach: Bottom-Up using SBN yield curve ± Illiquidity Premium max 0.5% per OJK guidance (Lampiran VI). Top-Down reserved for financially distressed insurers only.
OJK POJK No. 22/2024 · SEOJK No. 23/SEOJK.05/2024 · IFRS 17 Para B80–B81
Episode 4 — Key Takeaways
Two approaches permitted — Top-down (asset yield minus credit risk) and bottom-up (risk-free rate plus illiquidity premium) are both valid — each must reflect the liquidity characteristics of insurance contracts. Both must converge to the same rate.
PSAK 117 default: Bottom-Up — Indonesian insurers use the SBN (Government Securities) yield curve as the risk-free base, with an OJK-capped illiquidity premium of ±0.5%. Top-down applies only for financially distressed insurers.
IP varies by product type — Life annuities & endowments: up to 0.5% IP (OJK cap). Long-tail P&C: small IP with LIC discounting. Short-tail P&C (motor, property): near-zero IP; PAA eligible.
OCI election is critical — Electing OCI for insurance finance income/expenses shields P&L from interest rate volatility. Most global insurers elect OCI — must be documented and applied consistently across portfolios.
Locked-in rate for CSM — The yield curve at inception is locked in for CSM accretion (Para 44(b)). FCF is re-discounted at the current curve each period — the difference flows to OCI under Para 88.