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