CSM VS. LC
Hello, can you please clarify the following:
In IFRS17 reading(Wiki), it says that CSM = -FCF, when FCF is negative(There is a profit). The reading in IFRS17-LRC defines FCF = In-flow - Out-flow + Eff. Discounting - RA. Is FCF being defined differently in the two readings? My reasoning is that if we want a profit, we want Inflow > Outflow. Therefore FCF > 0 and CSM is negative.
What is the intuition behind:
- LC is expected to decrease at subsequent measurement if there is no change in assumption
- With favorable assumption change, LC decrease (Or increase?) to zero and then establish a CSM
The wiki says that if contracts are non-onerous(Net Positive Cash Inflow), contracts have a CSM. Is that necessarily true? What if we have a non-onerous group but FCF < 0 (Indicating Loss instead of profit). We should not have CSM right?
Comments
There are a couple of posts on this. This is because the CAS is inconsistent and defines FCF as both inflow - outflow, or outflow - inflow in different papers. I generally prefer the definition of outflow - inflow as that is more consistent with how FCF is defined when I actually do work on the IFRS17 balance sheet. You can do whatever fits you, as long as you define the excess of inflow over outflow as the CSM and if the outflow is greater than the inflow, then the loss component. Also, there is no such thing as a negative CSM, except for reinsurance held. If CSM is negative that means you have a loss component for direct insurance.
As coverage is earned, you eventually start to release the Loss Component. If there are favourable changes to your assumptions (i.e. decrease in ELR, then you zero out your LC and establish a CSM as your inflows are now greater than outflows)
And yes, that is true - You either have a CSM or a loss component. If you are non-onerous you have a CSM, and if you are onerous you have a loss component. There is no such thing as a loss making contract that is non-onerous