The International Financial Reporting Standard (IFRS) 17 requires liability cash flows to be discounted at rates that reflect the characteristics of the cash flows, including their liquidity
The International Financial Reporting Standard (IFRS) 17 requires liability cash flows to be discounted at rates that reflect the characteristics of the cash flows, including their liquidity.
As a principles-based standard, IFRS 17 does not specify liability discount rates and entities must develop their own assumptions. Such assumptions are important as they could have major implications for the IFRS 17 balance sheet, future profits, and volatility. Recently, significant thought and effort have gone into the specification of IFRS 17 discount rates allowing for liquidity.
The task of incorporating the illiquidity premium extends beyond estimating its size. For example, an insurer might apply the illiquidity premium to products where stochastic models are used for valuation. This presents its own set of challenges, both theoretical and practical, to which insurers are now turning their attention. In this paper, we compare two potential approaches:
1.The Single Yield Curve approach
2.The Dual Yield Curve approach
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