CSM roll forward | IFRS 17

The CSM is designed so that at initial recognition it represents any positive excess of the present value of expected premiums over expected claims, expenses and the risk adjustment (ie it's an estimate of the future profit).

Paragraphs 44 and 45 of the IFRS 17 standard detail how to roll the CSM forward from one point in time to another.

CSM roll forward for contracts without direct participation features

IFRS17.44 sets out how the CSM at the end of a reporting period is calculated for contracts without direct participation features, starting with the CSM at the start of the reporting period:

"For insurance contracts without direct participation features, the carrying amount of the contractual service margin of a group of contracts at the end of the reporting period equals the carrying amount at the start of the reporting period adjusted for:

1. the effect of any new contracts added to the group (see paragraph 28);
   
2. interest accreted on the carrying amount of the contractual service margin during the reporting period, measured at the discount rates specified in paragraph B72(b);
3. the changes in fulfilment cash flows relating to future service as specified in paragraphs B96-B100, except to the extent that:
   1. such increases in the fulfilment cash flows exceed the carrying amount of the contractual service margin, giving rise to a loss (see paragraph 48(a)); or
   2. such decreases in the fulfilment cash flows are allocated to the loss component of the liability for remaining
      coverage applying paragraph 50(b).
4. the effect of any currency exchange differences on the contractual service margin; and
5. the amount recognised as insurance revenue because of the transfer of insurance contract services in the period, determined by the allocation of the contractual service margin remaining at the end of the reporting period (before any allocation) over the current and remaining coverage period applying paragraph B119"

CSM roll forward for contracts with direct participation features

Whilst for groups being valued under the General Measurement Model only changes in non-financial assumptions are absorbed by the CSM, for groups being valued under the Variable Fee Approach (ie with direct participation features) the impact on fulfilment cash flows of changes in non-financial AND financial assumptions are absorbed by the CSM.

IFRS17.45 sets out how the CSM at the end of a reporting period is calculated for contracts without direct participation features, starting with the CSM at the start of the reporting period:

"For insurance contracts with direct participation features (see paragraphs B101-B118), the carrying amount of the contractual service margin of a group of contracts at the end of the reporting period equals the carrying amount at the start of the reporting period adjusted for the amounts specified in subparagraphs (a)-(e) below. An entity is not required to identify these adjustments separately. Instead, a combined amount may be determined for some, or all, of the adjustments. The adjustments are:

1. the effect of any new contracts added to the group (see paragraph 28);
2. the change in the amount of the entity's share of the fair value of the underlying items (see paragraph B104(b)(i)), except to the extent that:
   1. paragraph B115 (on risk mitigation) applies;
   2. the decrease in the amount of the entity's share of the fair value of the underlying items exceeds the carrying amount of the contractual service margin, giving rise to a loss (see paragraph 48); or
   3. the increase in the amount of the entity's share of the fair value of the underlying items reverses the amount in (ii).
3. the changes in fulfilment cash flows relating to future service, as specified in paragraphs B101-B118, except to the extent that:
   1. paragraph B115 (on risk mitigation) applies;
   2. such increases in the fulfilment cash flows exceed the carrying amount of the contractual service margin, giving rise to a loss (see paragraph 48); or
   3. such decreases in the fulfilment cash flows are allocated to the loss component of the liability for remaining coverage applying paragraph 50(b).
4. the effect of any currency exchange differences arising on the contractual service margin; and
5. the amount recognised as insurance revenue because of the transfer of insurance contract services in the period, determined by the allocation of the contractual service margin remaining at the end of the reporting period (before any allocation) over the current and remaining coverage period applying paragraph B119."

Example 1 : Aviva

Aviva H1 2023 CSM roll forward

As expected, we can see that the starting CSM for Aviva, 6,463m is the same as the closing CSM for 2022:

• New business CSM is less than half of the 2022 new business CSM.
• Interest accretion is strong compared to 2022.
• New business CSM and interest accretion is less than the CSM release.

Aviva add the CSM to the risk adjustment to get a measure of what they call "stock of future profit".

Aviva 2022 CSM roll forward

Example 2 : CSM was 28% GMM & 72% VFA

The CSM for the VFA business is directly impacted by market movements (ie they're absorbed by the CSM), the release to profit of which is smoothed via coverage units release. For the GMM business, the difference between actual and expected investment return is recognised in the non-operating result.

The release to P&L of the CSM is often the biggest item in the income statement, and this was the case for Prudential.

Example 3 : GMM & VFA

For Ping An the expected interest growth on the CSM was nearly the same size as the contribution from new business, with a negative impact from the changes in estimates that adjust CSM (changes in non-economic assumptions). Something which deserves further investigation is the release of CSM being greater than the contribution from new business, and end of year CSM being down on the CSM at the start of 2022.

Example 4 : CNP Assurances - slightly declining CSM

A healthy sign is that CNP Assurances saw their new business CSM exceeding the CSM allocated to insurance revenue based on coverage provided (1,566). " Non-recurring effects (-0.7bn) mainly concern France and correspond to (i) the effect of inflation on administrative and (ii) the adjustment of term creditor insurance surrender ratesThe market effect included in the CSM concerns the Savings/Pensions business and is neutral overall (+0.1bn), with positive effects in France and Latin America mitigated by negative effects in Europe excluding France."

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