csm

[dimitris13]

Hi there,
two question regarding csm.
1. suppose we change lapse assumptions does this affect the writting off pattern of csm ?
2. the total liability is equal to the following after inception (t>0)
BEL+RA+CSM?

thanks

 

[Em Francis]

Hi there,
two question regarding csm.
1. suppose we change lapse assumptions does this affect the writting off pattern of csm ?

Hi
Yes, as when we use the BBA valuation method:

The pattern will change if the company is using number of policies in-force as the coverage unit. This is because the CSM will be written down by proportioning between the actual number of policies in-force over the current period and the expected future policies in-force. This will change if the lapse assumption changes, impacting the write down pattern.

Also, the amount of CSM to write off will change as when there is a change in non-investment assumptions, this gets absorbed by the CSM (if it is large enough) which subsequently will impact how much gets written down.

2. the total liability is equal to the following after inception (t>0)
BEL+RA+CSM?

thanks

Yes. broadly speaking.

 

[dimitris13]

Hi Em ,

many thanks for this.
i am reading the sa2 notes and they write : that the csm offsets any change in BEL and RA. So if the liability is what i wrote (in a trivial case where we dont write down the csm) the Liability will remain the same. I suppose that my interpretation is wrong (or the trivial case that i am thinking - no write down is not valid).
Having said that if there is a writing down of the csm if the liability (in the balance sheet) is BEL +RA+csm will change only by the writting down effect of the csm.

I am obviously missing sth but i cannot figure what.
In S2 in the BS for TPs we have for example BeL + RM
in ifrs17 bs as Liability we put BEL + RA + CSM ? or csm is shown somewhere else ?

 

[Mateusz]

Under IFRS 17, the total liability can be split per Liability for remaining coverage (BEL+RA+CSM) and Liability for incurred claims. So yes, the CSM is a component of the insurance liabilities.

Now, the idea that the CSM offsets changes in the BEL/RA works when these changes relate to future service. For example, if you change lapse assumptions and this results in a BEL+RA increase of 100, the CSM will be reduced by 100 (assuming the CSM before the adjustment was at least 100. If not, loss is recognised immediately in the P&L and CSM set to 0). So in this case the impact on the liability for remaining coverage is indeed 0.

In general, however, the total liability for remaining coverage (BEL+RA+CSM) will change from period to period. Release of profits from BEL will very unlikely match the CSM amortisation pattern. Also, there will be changes in the roll-forward of BEL not unlocked in the CSM at all (e.g. impact of discount rate changes in the general model, expected vs actual variance in claims/expenses incurred in a given period, etc.)