IFRS 17: Contractual Service Margin

[mss2114]

Hi, I have a few questions related to IFRS 17.

1. The initial CSM of IFRS 17 is written down (amortised) over the term of the contract based on a coverage unit measure eg number of policies in force. Are there any other amortisation patterns?
2. In the notes it also states that CSM offsets the change in value of the BEL and RA due to assumption changes, which means the profit reported in a given year will be affected more by actual experience and less by assumption changes. How would this be done? If there is a non-investment assumption change then the BEL and RA will change by a certain amount compared to using the same assumptions. So do we adjust the CSM by the same amount to ensure no impact from assumption changes?
3. Also for the BBA approach do we "only" adjust the CSM for changes in non-investment assumptions?
4. For the VFA do we unlock the CSM for any "non-investment" assumption changes?
5. Under current US GAAP, the amortisation for DAC is done by fixed % of Gross Premiums (FAS 60 long) or Estimated Gross Profits and Actual Gross Profits (FAS 97 UL or IC), but with LDTI (Long duration targeted improvements) this is being changed to straight line amortisation. So is there a reason that after all this time we're moving towards simplified amortisation patterns under both US GAAP and IFRS?

Thanks for your support as always

 

[Em Francis]

Hi

I will try and help with those which you would be expected to know for SA2.
Please see responses below.
Thanks
Em

Hi, I have a few questions related to IFRS 17.
The initial CSM of IFRS 17 is written down (amortised) over the term of the contract based on a coverage unit measure eg number of policies in force. Are there any other amortisation patterns?

Yes, this is only an example. IFRS 17 requires the CSM to be recognised over the coverage period in a pattern that reflects the provision of insurance coverage as required by the contract. Policies inforce is a sensible choice for this, likewise, assets under management may be a sensible choice for a unit-linked contract. Or sum assured * policies inforce for a term assurance.

In the notes it also states that CSM offsets the change in value of the BEL and RA due to assumption changes, which means the profit reported in a given year will be affected more by actual experience and less by assumption changes. How would this be done? If there is a non-investment assumption change then the BEL and RA will change by a certain amount compared to using the same assumptions. So do we adjust the CSM by the same amount to ensure no impact from assumption changes?

Yes, to ensure there is little volatility from non-investment assumption changes.

Also for the BBA approach do we "only" adjust the CSM for changes in non-investment assumptions?

I believe anything that would make the BEL or RA change (apart from the investment assumption changes) would be adjusted in the CSM. For instance, if premiums were more than expected and so future risk is more, then the CSM would be adjusted. Whereas if expenses were higher than expected, and there would be no resultant change in BEL or RA, then this would just go through to the profit and loss account.

For the VFA do we unlock the CSM for any "non-investment" assumption changes?

Under the VFA model, we unlock for all assumption changes.

Under current US GAAP, the amortisation for DAC is done by fixed % of Gross Premiums (FAS 60 long) or Estimated Gross Profits and Actual Gross Profits (FAS 97 UL or IC), but with LDTI (Long duration targeted improvements) this is being changed to straight line amortisation. So is there a reason that after all this time we're moving towards simplified amortisation patterns under both US GAAP and IFRS?
Thanks for your support as always

 

[mss2114]

Thanks Em