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CSM Unlocking

J

jack

Member
Hi there,

I am struggling to get my head around what the “ unlocking” means when we say:
“ for the VFA approach, the csm is unlocked at each future period to absorb the change in the value of BEL and RA as a result of the change in the discount rate “

and related to that, for the GMM approach, I don’t understand what it is meant by:

“ another feature of the CSM is that ut offsets the change in the value of the BEL and RA due to assumption changes”.

I understand why the BEL and RA will change if assumptions and/or discount rate is changed. But I don’t understand how that impacts the CSM.

I understand that initial CSM at the point the contract is written is
= initial premium - initial expenses - BEL - RA
Then this particular CSM value calculated at inception is released throughout the contract term.

(Very basic example) but I had interpreted this to mean that if for a 5 year contract at time 0 our CSM was 100, then 20 would be released as profit in IFRS accounts in each of the 5 years. Which is why I can’t understand how if the BEL/RA changes in future then why would th CSM change.

does this mean we re calculate the CSM each year.

possibly a numerical example might help me to make sense if this unlocking/assumption change feature.

thanks very much in advance, appreciate the help.
cheers
 
Yes, CSM is recalculated at the end of each period to take into account NB CSM as well as changes that will impact the CSM based on movements in the BEL and RA. So for eg, if your mortality assumption has been adjusted, then your BEL+RA should also adjust and that will affect your CSM. Certain changes will affect your CSM while other changes go straight to your P&L. There's a lot of free resources online (and by the IFOA) about CSM and BEL+RA that should help. Tutors correct me if I'm wrong please.
 
Thanks MindFull - sounds good to me.

The basic idea behind unlocking the CSM if we change certain assumptions is that, without doing this, a change in our future assumptions about mortality say would affect the BEL now and so affect this year's profit through the P&L. By instead unlocking the CSM and adjusting it to reflect the impact on the BEL of the change in mortality assumptions, we will instead affect future profits (via the future releases of CSM) rather than profit now. In your example Jack, the 20 as the profit we expected each year based on our assumptions at the time 0. If our assumptions about the future change during the life of the policy than these future expected profits should change too.
 
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