Policyholder option to surrender contract for cash surrender value
An insurance contract gives the policyholder the option to surrender the contract for a cash surrender value specified in a schedule i.e. not indexed and does not accumulate interest.
Fair value measurement is not required (but not prohibited) because the surrender option is for a fixed amount even though that fixed amount may differ from the carrying amount of the insurance liability. The surrender value may be viewed as a deposit component, but IFRS 4 does not require an insurer to unbundle a contract if it recognises all its obligations arising under the deposit component (see Section 5 below).
If this was an investment contract measured at amortised cost then fair value measurement of the option would be required if the surrender value was not approximately equal to the amortised cost at each exercise date. [IFRS 4.IG4 E2.12].
The relief from applying IAS 39 to certain surrender options discussed above does not apply to put options or cash surrender options embedded in an insurance contract if the surrender value varies in response to the change in a financial variable (such as an equity or commodity price or index) or a non-financial variable that is not specific to a party to the contract. Furthermore, the requirement to separate and fair value the embedded derivative also applies if the holder’s ability to exercise the put option or cash surrender option is triggered by a change in such a variable, for example a put option that can be exercised if a stock market index reaches a specified level. [IFRS 4.8]. This is illustrated by the following example.