CSM can never be negative?

Discussion in 'SA2' started by Tong_Tong, Jul 22, 2020.

  1. Tong_Tong

    Tong_Tong Active Member

    In page 537 of the latest SA2 course note.

    We are given the formula: CSM = Initial premium – Initial expenses – BEL – RA

    I assume the "initial premium" is referring to the present value of all future premium payments? Otherwise if they are referring to the first premium payment only then CSM will be 0 for all regular premium paying policies?

    Thanks,

    Tong
     
  2. Em Francis

    Em Francis ActEd Tutor Staff Member

    Hi

    No CSM cannot be negative and has a floor of zero. If BEL + RA exceeds the initial net cashflow, a loss would be recognised immediately.
    The initial premium is just referring to the initial premium. Any regular premiums would be allowed for in the BEL.
    Hope this makes sense.
    Thanks
    Em
     
  3. Tong_Tong

    Tong_Tong Active Member

    Thanks,

    In that case would it be fair to say that BEL can be negative value in a lot of the policies where regular premiums are paid out? In other words... they will be a positive contribution towards the CSM calculation i.e. - (a negative value) will make a positive
     
    shdh likes this.
  4. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Just to add in response to your specific point: the CSM won't always be 0 for regular premium policies - it could well be positive. This is because the BEL can be negative for regular premium policies. In fact, the BEL would be expected to be negative at outset for profitable RP policies due to profit loadings [BEL = PV future {benefits + expenses - premiums} and we would expect PV future premiums > PV future {benefits + expenses} due to profit loadings]
     
    shdh likes this.
  5. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Yes! (We posted at exactly the same time I think!)
     
  6. Tong_Tong

    Tong_Tong Active Member

    Thanks!!!!! I understand... Great minds think alike ^_^
     
    shdh and Lindsay Smitherman like this.

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