The contractual service margin

A contractual service margin roll-forward

A life insurer's group of contracts has a CSM of 1,000 at the start of the year. During the year it writes new contracts in a group with a CSM of 200, near the year end. The locked-in discount rate is 3%. Mortality experience leads it to raise expected future claims, an increase of 150 in present value at the locked-in rate. Coverage units provided in the year are 100, and 400 are expected in future years.

The release is calculated after all other movements, so the year's profit reflects the latest estimate of the margin. Had the increase in expected claims been 1,400 instead of 150, it would have used up the whole CSM of 1,230 and the remaining 170 would have been recognised as a loss, making the group onerous.

Which changes adjust the CSM?

• Changes in estimates of future cash flows that relate to future service, such as expected claims, lapses and expenses, measured at the locked-in discount rate.
• Experience adjustments for premiums received that relate to future service.
• Changes in the risk adjustment that relate to future service.
• Differences between the investment components expected to become payable in the period and those that actually do.

Changes that relate to current or past service, such as claims in the year differing from expectations, go to profit or loss instead. Changes caused by discount rates and other financial assumptions go to insurance finance income or expense.

What are coverage units?

A measure of the service provided by the contracts in a group, reflecting the quantity of benefits and the expected coverage period of each contract. For term life, coverage units are often the sum assured of policies expected to be in force; for annuities, the expected payments; for some contracts, investment-return services are included as well. IFRS 17 neither requires nor prohibits discounting coverage units, so practice varies. The choice of coverage units changes the pattern of profit, so insurers disclose how they set them.

How does the CSM work under the variable fee approach?

For direct participating contracts, the CSM also absorbs changes in the insurer's share of the fair value of the underlying items, such as fees earned on a unit-linked fund, and is not accreted at a locked-in rate. Market movements therefore flow through the CSM rather than straight into profit.

Is there a CSM under the premium allocation approach?

No. The PAA has no separate CSM: profit emerges as premiums are earned and claims are incurred. See the premium allocation approach.

Why does transition still matter for the CSM?

For contracts in force when IFRS 17 was adopted, insurers set the CSM using the full retrospective approach, the modified retrospective approach or the fair value approach. The fair value approach often produced a very different CSM from the other two, and for long-term life business much of the CSM being released today was set at transition, so insurers disclose the CSM split by transition method.

Why do analysts watch the CSM?

Because it shows profit already secured but not yet recognised. Insurers report the CSM roll-forward, new business CSM as a measure of the value of the year's sales, and the expected pattern of future release. Equity plus the CSM after tax is sometimes used as a measure of an insurer's underlying value. See the general measurement model, onerous groups and insurance accounting under IFRS 17.

This guide is general information. It is not tax or legal advice for your situation.