The CSM (Contractual Service Margin) represents a store of future profit which will be released should expectations unwind as expected, and as service in the form of coverage units is provided to policyholders.
The CSM, is set so that, at initial recognition, the best estimate liability (present value of claims + expenses - premiums) plus the risk adjustment of an IFRS 17 group is not negative (if there are any cash flows arising from the contracts outside of those, or any assets for insurance acquisition cash flows, or other asset or liability related to the group; these should also be taken into account). Under IFRS 4 many companies would upfront this profit, and this is avoided under IFRS 17 by creating the liability liability.
Once the CSM has been determined at initial recognition, it is rolled forward from one valuation date to the next, in accordance with paragraphs 44 and 45 of the IFRS 17 standard.
If the present value of premiums is less than the present value of claims, expenses and risk adjustment; then a loss component is calculated and immediately expenses.
