The core reading defines the IFRS17 GMM contractual service margin as: CSM = (Initial premium - initial expenses) + (BEL + RA) I'm trying to imagine how recognising profit might play out and want to check my understanding. Suppose I wrote a 5 yr contract for an initial premium of 100, initial expenses of 10, BEL at inception of -10 and RA of 5. So the CSM is (100 - 10) + (-10 + 5) = 85. Recognising this over the 5yr contract duration gives an annual CSM value of 85/5 = 17. How would I calculate the IFRS17 profit to be recognised in yr 2 if there was a claim on the policy of 200? Would it be the annual CSM less claims (ignoring expenses)? So (17-200) = (183)? I'm wondering how changes in the BEL and RA are recognised on top of this? Lastly - the CMP says that the PAA is not considered further. Does this mean it isn't examinable? Sorry for scattergun of questions!
Hi Matt Thanks for having a go at this with some numbers. Unfortunately your formula isn't quite right - you have the sign wrong outside the brackets. so it should be: CSM = (Initial premium - initial expenses) - (BEL + RA) The CSM is designed as a balancing item so that no profit is made at outset, ie the increase in the assets (Initial premium - initial expenses) balances the increase in the liabilities (BEL + RA + CSM). So taking your numbers, we have the assets increasing by 90 (100-10). The RA + BEL = -5, so the CSM is 95, giving total liabilities of 90 (so no profit as assets and liabilities are equal). If we recognised the profit evenly over the contract then 95/5 = 19 of CSM would be released each year. Let's consider year 2. Claims are 200 as per your suggestion. Let's say there's also premium of 210, expenses of 5 and investment return of 1. So in total the insurer has made a profit of 210 - 200 -5 + 1 = 6. But if this experience is exactly the same as our best estimate assumptions in the reserves then this will be offset by an increase in reserves of 6 (that's why you had negative reserves because you were expecting positive cashflows in the future). So overall there is no profit or loss this year (which is what you would expect with a best estimate calculation). However the accounts would show a profit due to the release of CSM that year of 19 - there may also be a release of the RA that year which also contributes to profit. If the expected claims were 200, but the actual claims were 190, then there would be a further 10 to add to profit. I hope the numbers above help to explain what is going on. The exam should be based on the Core Reading. So the examiners will expect you to know what the Core Reading says about the PAA and also what is covered elsewhere (eg in SP1) about the unearned premium reserve. Best wishes Mark
