Onerous Contracts

By defn, contracts are onerous at initial recognition if the sum of FCF, acquisition costs, cash flows arising from the contract at the date of initial recognition is a net outflow. We also know that the CSM component of an insurance contract is non zero when the FCF indicates a net cash inflow and that the CSM component of onerous contracs is always 0. I have issues with this following scenario- what would happen in the case that FCF indicates a net cash inflow but the total sum sum of FCF, acquisition costs, cash flows arising from the contract at the date of initial recognition is a net outflow. Basically from what I understand the net inflow of FCF indicates the insurance contract has a CSM component but by defn the contract is also onerous and should a CSM value of 0

Comments

  • " FCF indicates a net cash inflow but the total sum sum of FCF, acquisition costs, cash flows arising from the contract at the date of initial recognition is a net outflow. " If this happens then it would be onerous and not have a CSM. You cant have a FCF < 0 and be onerous. It just doesn't happen and cannot happen

  • Are acquisition costs, cash flows arising from the contract at the date of initial recognition always cash inflows then?

  • No, they are all outflow. They should all be included in your FCF

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