7 - International Actuarial Association
IAN 6 Contractual Service Margin (CSM)Chapter I: Concept of CSM1.1 What is the CSM conceptually?Under the general accounting model (GAM), at the initial recognition of the contract, if the value of cash inflows exceeds the value of cash outflows including any required adjustments for time value of money and risk, the difference is added to the value of net cash outflows as initial measurement so that no profit emerges at initial recognition. This difference is according to IFRS 17.38 the Contractual Service Margin (CSM). The CSM is introduced in order to prevent profits from arising at inception of an obligation to provide future services, since this is not considered appropriate under accounting principles (IFRS 17.B21). A profit that would be recognized at issue would be based completely on assumptions about the future and would therefore be of minimal reliability (IFRS 15.BC25 (b) and (c)).IFRS 17.38 states that theCSM “represents the unearned profit the entity will recognise as it provides services in the future”, i.e. that part of premium which is, according to the actuarial calculation, not needed for future services. Due to the accounting limitation of cash flows to be considered, the CSM also includes parts of premiums intended in pricing to cover future expenses of the entity not included in the present value of future cash flows such as certain overhead expenses (IFRS 17.B66 (d)).If the expected cash inflows are not sufficient to provide for the expected cash outflows including the required adjustments, then the CSM is set to zero and the contract is said to be onerous (IFRS 17.47). The intention is to show losses from writing onerous contracts immediately (IFRS 17.BC119 sentence 7).The subsequent measurement of the CSM is based on the “group of insurance contracts” which is the unit of account of the CSM. Background is the intention of the IASB to “provide useful information about insurance activities, which often rely on an entity issuing a number of similar contracts to reduce risk” (IFRS 17.BC118) Since the CSM “represents the profit in the group of insurance contracts that has not yet been recognised in profit or loss because it relates to the future service to be provided under the contracts in the group” (IFRS 17.43), the CSM is adjusted for changes in estimate of the value of the future services, accordingly limited to those related to non-financial risk (IFRS 17.B97 (a)), i.e. for those risks which can be reduced in a collective of similar contracts. That corresponds to the acceptance of guaranteed insurability in many insurance contracts as integral part of the insurance promise covering any individual change of risk subsequent to issuance which forms the basis for the contract boundary in IFRS 17.34. Such changes can be off-set among contracts within a group of insurance contracts.The CSM is in each period partially released into “insurance revenue because of the transfer of 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” (IFRS 17.44 (e)). Due to the limitation to the coverage period and the release in proportion to coverage units (IFRS 17.B119), a CSM exists only for a liability for remaining coverage as long as coverage is provided and not for a liability for incurred claims.1.2 Which special cases for the CSM might be considered?1.2.1 Insurance contract assetsThe CSM increases an insurance liability or, alternatively, reduces an insurance asset. 1.2.2 Reinsurance For insurance contracts the CSM is not allowed to be negative at issue. As discussed under 1.1, if the calculation gives a negative CSM, this amount needs to be set to zero, making the contract onerous. That applies equally to insurance contracts issued by the entity which are reinsurance contracts.For reinsurance contracts held (ceded), however, the CSM relating to the reinsurance contract can be positive or negative, i.e. decreasing or increasing the reinsurance asset or reinsurance liability. For reinsurance held, the CSM serves two different purposes, either deferring of profit to avoid initial gains as for insurance contracts issued or deferring cost as the services acquired are provided as elsewhere in accounting for acquiring services. For more details, consult IAN X on reinsurance.1.2.3 Mutual companies, participating or performance-linked business and insurance at costThe CSM for a contract issued by a mutual insurer, a participating or performance-linked contract or an insurance contract at cost is calculated at initial recognition identically to the general case. There is some special guidance for the subsequent measurement of certain participating contracts (see IAN Participating Contracts). There may be cases, where the insurer may not retain any profit from providing the services under the insurance contract. In those cases, since there is no expected ultimate profit, there is no CSM. For more consult IAN X on participating contracts.1.2.4 Investment contracts with DPF and hybrid forms with insurance contratsThe CSM for Investment contracts with DPF are calculated at initial recognition in the same manner as for insurance contracts. There are some peculiarities to be considered in subsequent measurement. For more, consult IAN X on Investment Contracts with DPF. In some cases, contracts in the scope of IFRS 17 have a sequential hybrid character. They may include for insurance risk initially for a period of time and then, after fulfilling all obligations to provide coverage, they have exclusively the character of investment contracts with DPF. An example would be participating contracts where the insurance risk is exhausted since the surrender value or accumulated funds exceeded the minimum death benefit. IFRS 17 does not consider such a situation. IFRS 17 understands services provided under an investment contract with DPF as suitable to justify the release of revenue over the time of providing such services by means of release of the CSM. Since exactly the same services are provided in the second section of a contract with sequential hybrid character, the entity might consider whether it is appropriate to include the second section in the release pattern of the CSM over the entire duration of providing services under the contract, following for the release pattern a combination of the guidance for both types of contracts.Chapter II: Basis of Determination: Group of insurance contracts2.1 At which level of aggregation is the CSM initially and subsequently measured?The CSM is measured for a group of insurance contracts (IFRS 17.38). A group of insurance contracts is defined as a“set of insurance contracts resulting from the division of a portfolio of insurance contracts into, at a minimum, contracts written within a period of no longer than one year and that, at initial recognition:are onerous, if anyhave no significant possibility of becoming onerous subsequently, if any, ordo not fall into either a) or b), if any.” (IFRS 17.A)For ease of reading and to avoid any confusion with any other use of the word “group”, the defined term “group of insurance contracts” (IFRS 17.A) is subsequently referred to as GIC. The determination of GICs results in a partition of a portfolio of insurance contracts (IFRS 17.16, defined in IFRS 17.A), which is referred to subsequently as PIC as well to avoid confusion with any other use of the word “portfolio”.Measuring the CSM for a GIC permits contracts with various profitability to be included within the same unit of account. It also allows contracts that become on a stand-alone basis onerous to not be presented as such so long as there are sufficient profitable contracts in the same GIC. The purpose of allowing off-setting of results in a GIC is to present adequately the risk mitigation from providing insurance services (IFRS 17.BC118). IFRS 17.16 requires, nevertheless, a differentiation at outset to identify those losses caused by a decision of the management to acquire a contract that is expected to reduce the resources of the entity and beyond that to limit the effect of mitigation by the GICs by separating where this risk of becoming onerous in future is very limited from those where it is more likely (IFRS 17.BC119-BC125).The general principle in IFRS is that accounting should present the effect of each individual business decision for a transaction, whether it creates or eliminates resources of the entity. For insurance contracts, however, the board applies that principle strictly only at outset but recognized that insurance contracts “often rely on an entity issuing a number of similar contracts to reduce risk” and that therefore the CSM should be calculated in subsequent measurement at a GIC level to represent the risk mitigation during the provision of coverage (IFRS 17.BC118).Before any insurance contract can be considered in initial measurement of the CSM, the contract is permanently grouped with other contracts in a GIC. This initial allocation to a GIC is subsequently referred to as the “grouping” of the contract and occurs as the first step in recognizing a contract under IFRS 17.IFRS 17 provides only guidance regarding the maximum composition of GICs specifically permitting a more granular approach (IFRS 17.21) and even allows that a GIC may contain only one contract (IFRS 17.23), see question 2.X.The fact, that the approaches and allocation decisions made in the past regarding GICs might be seen as accounting policies (compare IAN XX Accounting Policies), may demand special care in developing those. IFRS 17.24 states: “An entity shall establish the groups at initial recognition, and shall not reassess the composition of the groups subsequently.” 2.2 What is a portfolio of insurance contracts?A portfolio of insurance contracts (PIC) is defined in IFRS 17.A as “Insurance contracts subject to similar risks and managed together”. A PIC is thus a part of the insurance business of the reporting entity containing those contracts subject to the scope of IFRS 17 (see IAN Classification) whose characteristics meet the specification of the respective PIC. All PICs together therefore form a partition of the total insurance business of the reporting entity. Accordingly, each contract within the scope of IFRS 17 is at each reporting date allocated to exactly one PIC.The main purpose of this partition is to form the basis for grouping contracts at their initial recognition to GICs. Other purposes of this partition are that they were chosen as well as basis for several accounting decisions:Option to apply OCI (IFRS 17.B129, see IAN Presentation)Determination of the contract boundary (IFRS 17.34 (b) (ii) and B64, see IAN Classification)Differentiating between cash flows other than exchanged with the policyholder arising in fulfilling the contract within the scope of IFRS 17 from cash flows outside the scope of IFRS 17, mainly general overhead (IFRS 17.A definition of insurance acquisition cash flows, B65 (e) and B66 (d), see IAN Cash Flows)The relationship of those other purposes to the definition of a PIC for purposes of determining GICs is discussed in the respective IANs. The definition of PICs was chosen to refer to the risk mitigation effect as basis for the measurement of the CSM. This focus on those risks to be mitigated by managing them by means of the insurance business model might not be suitable in the same manner for the other purposes referred to. Refer to the respective IANs whether for the purposes there special considerations regarding the choice of PICs may exist.The definition of a PIC refers to two characteristics of a contract, to the risks in the contract and the approach of managing the contract. This is in line with the intention to allow for risk mitigation effects in the unit of account of the CSM based on the Laws of Large Numbers and the Central Limit Theorems as outlined in IFRS 17.BC118. That may be seen as indicating that the intention is to have, if possible, in PICs sufficiently large numbers to achieve at the level of GICs the desired mitigation effect (see adjustment for experience adjustments). The definition might be interpreted to allow for merely large PICs rather than fragmenting the book of business by extensive differentiation of risks and management approaches.Although the allocation of contracts to PICs based on those two criteria is often significantly judgmental, IFRS 17 might not be considered to grant any discretion in determining the PICs. In difference to IFRS 17.21 regarding GICs, IFRS 17 does not seem to permit a more granular partition than required by the definition of a PIC. Due to IFRS 17.4, the reference to insurance contracts in the definition of a PIC includes as well investment contracts with discretionary participation features (see IAN Investment Contracts) and reinsurance contracts hold (see IAN Reinsurance). That might result in separate PICs for investment contracts with DPF aggregated as managed together and for reinsurance contracts held based on the risk and management. 2.2.1 What does it mean that contracts in a PIC are subject to similar risks?The key question is the meaning of the reference to risk, while the use of the word “similar” indicates a certain judgmental factor in determining comparability of the risks in different contracts.IFRS 17.14 refers to product lines and provides as examples for that term without a general definition two examples, “single premium fixed annuities” and “regular term life assurance”, one covering longevity risk only, the other covering mortality risk only. To understand the background, it might be helpful to focus on the singularity in IFRS of off-setting contracts in the scope of IFRS 17 by means of GICs and the history of the PIC in developing IFRS 17.Purpose of the PIC here is to form the basis for grouping of contracts determining the unit of account for the CSM. IFRSs do not normally permit to off-set onerous and profitable contracts and the exception in IFRS 17 might be seen as a result from the risk mitigation in a pool of insurance risks (see IFRS 17.BC118). It seems accordingly natural to understand insurance risk as key differentiating factor of PICs. If the IASB would believe that as well other risks, which are as well present in contracts subject to other IFRSs, might be a reason for off-setting, it might have permitted off-setting on a collective basis as well in other IFRSs. In addition, financial risks usually do not affect the CSM and its release pattern (see X.X.X) and accordingly it might not be seen as suitable to consider financial risk in determining the unit of account for the CSM.The concept of a PIC was introduced in discussing the consideration of risk mitigation in a pool for measurement of the risk adjustment for non-financial risk and to apply the liability adequacy test of IFRS 4.18 (see IFRS 4.BC100, AP 12D September 2006, DP 2007.190-202, AP 2C February 2017 issue B1) and referred until the final standard to a management in a single pool. The reference to a pool was eliminated to be in line with the wording in IFRS 9 referring there to the risks relevant for IFRS 9. This discussion may result in the conclusion that as well historically the term PIC was thought only to refer to insurance risk which is capable to mitigated in a pool while particularly similar market risks are by definition cumulative risks without any pooling effect.Accordingly, for purposes of determining GICs as basis for measuring the CSM, the relevant risks might be seen as those risks in a contract, which the insurer understands as being key for applying the insurance business model, i.e. where the insurer applies the risk mitigation in a pool. Such risk mitigation requires that the risks are between contracts to some extent uncorrelated and similar. Risks might be seen as being similar, if the insurer believes those risks to be capable to result in a risk mitigation in a pool.That might usually include insurance risk rather than other risks which might be included as well in insurance contracts. But as well some other risks, e.g. lapse risks, might be mitigated in a GIC, since any form of termination affects the release pattern of the CSM. To comply with the objective of grouping, as well such risks triggering the termination of contracts could be relevant for determining PICs.Such risks can be described in simple terms by reference to underlying danger, e.g. storm, theft, death or lapse. However, relevant for risk mitigation might be less such a trivial description of risk but the ability to achieve a systematic risk mitigation in a pool. Accordingly, e.g. reinsurers extracting risks from direct contracts and re-packaging those, might focus merely on similar distributions rather than on underlying covered dangers.2.2.2 What does it mean that contracts are managed together?IFRS 17 assumes that insurers manage insurance contracts as a unit in all aspects of fulfilment, management of insurance risk, acquisition, administration, investment and settlement. Accordingly, IFRS 17.14 simply refers to the management of contracts assuming that this is a clear criterion. Actually, insurance contracts are often not managed as a unit. Insurance risk is pooled separately based on risk characteristics and managed accordingly, particularly if contracts contain several mainly uncorrelated risks. Acquisition procedures follow often client- rather than risk-oriented characteristics and result therefore in a different partition. Administrative work follows administrative characteristics and the investment management complies with contractual requirements or liquidity characteristics of cash flows.Starting from the assumption, that certain contracts are managed together regarding all aspects of fulfilment, IFRS 17 applied the PIC as basis for accounting decisions of different type, particularly referring to different aspects of fulfilment as outlined in x.x.x. above.Understanding as PICs actually those collectives of contracts which are in all aspects “managed together” would result often in inadequate small PICs which do not represent in any aspect the approach of the entity to manage the risks and to achieve mitigation effects, i.e. the resulting GICs would not comply with the objective as described in IFRS 17.BC118.Contracts might be seen as managed together in respect of a certain risk if product development, pricing, underwriting and monitoring the risk, including reinsurance and other risk mitigation policies, are applied consistently. IFRS 17.14 clarifies that PICs would be seen as not covering contracts from more than one product line without defining that term. Product lines might be seen as product types all focusing on one major risk type, e.g. mortality risk, longevity risk (compare IFRS 17.14), third party liability etc. IFRS 17 does not state that a partition in product lines can be seen generally as an appropriate partition for determining PICs. In some cases, a refinement might be needed if the entity manages some parts of a product line clearly separately in some relevant aspects. For example, if the entity manages consumer and commercial business of third party liability separately, particularly considering the significant differences in the risk exposure, it might consider to treat both as separate PICs. In other cases, an entity might define product lines not as traditionally based on the insured risks but based on financial risks, e.g. investment types or participation clauses. Such unusual defined product lines might not be seen as in line with the objectives of IFRS 17.2.2.3 What is the portfolio of insurance contracts if contracts are subject to several risks to be considered?The concept of IFRS 17.14 fails if the insurance contracts actually contain several distinct risks which are managed each separately rather than managing the contract as whole. As a result, the necessary refinement of the partition of the business in product lines, as the entity actually manages the contracts broadly, might result in very small PICs, one for each existing risk combination, deviating severely from the objective as outlined in IFRS 17.BC118.Here, it might be appropriate apply judgment. There are conceptually three possible solutions:The PIC is defined based on the main risk, if any, of the contract, e.g. as represented by the product line, all other are ignored in defining the PIC.The contract is split in several partial contracts (insurance components) each containing just one risk – this might be typical solution if the contract is actually composed by moduls where each modul is priced separately. Diversification effects among the risks can in any case be considered in the risk adjustment for non-financial risks beyond the borders of a PIC according to IFRS 17.B88. IFRS 17 does not explicitly prohibit the separation of insurance components from an insurance contract, as long as it remains an insurance contract. This may be permitted under applying the principle of substance over form.Contracts are assumed to be managed together based on the composition of risks inherent in the contract, i.e. the “similar” condition is applied as well to combinations of risks – that would apply mainly if actually severe interdependencies among the included risks exist and the number in each resulting PIC are still seen to be sufficient to achieve the objectives of the partition of the business in PICs.2.2.4 When is a contract allocated to a portfolio of insurance contracts?PICs are defined by their characteristics according IFRS 17.14. Accordingly, at issuance of a contract it might be mostly clear to which PIC the contract will belong. Technically, a decision is not needed before the contract has to be grouped (see 2.3.1). Typically, the affiliation of a contact to a PIC can be directly derived from basic product features, particularly if each PIC represents a product line.2.2.5 Are portfolios of insurance contracts to be defined fixed for all times?Since PICs are open for new business, the question arises whether PICs are permanent structures or open for revision. IFRS 17 is silent on this matter. However, since the definition of a PIC refers to a criterion, “managed together”, which may change over time and IFRS 17 requires a current position for any new business, the PICs may change over time. Since they are a partition of the entire insurance business, any change in one PIC has unavoidably consequences to other PICs.There is no indication in IFRS 17 that such change in the determination of PICs might affect past accounting decisions based on the past determination of PICs. Accordingly the actuary might assume that such past accounting decisions would not be affected, particularly the once chosen GICs remain unchanged due to IFRS 17.24 disregarded any subsequent change in determining PICs, i.e. any change of PICs would affect only subsequent accounting decisions applied on the basis of PICs. Accordingly, any change in the definition of PICs would affect the determination of GICs of subsequent new business.2.2.6 Is the entity free to refine the partition of the business in force by creating further PICs?The PICs are expected to represent the organizational reality of the entity rather than being arbitrary aggregations. The entity might fix its principles in determining PICs in its accounting policies and retain those. Organizational reasons may justify in line with the accounting policies to create a further PIC or to close a PIC for new business.2.3 What is a group of insurance contracts?The groups of insurance contracts (GICs) are a partition of new business cohorts of PICs. Each GIC is the unit of account for the CSM arising in measurement of the insurance contracts in the GIC according to IFRS 17.38. For grouping of contracts acquired in a portfolio transfer or business combination see IAN Business Combination.2.3.1 When is an issued insurance contract grouped to a GIC?The grouping might be seen to apply only to contracts within the scope of IFRS 17 already issued (IFRS 17.15), not those in initiation.The grouping process of a contract as subsequently described starts on the issuance date and refers to the date of initial recognition of a contract as described in IFRS 17.25. Although IFRS 17.25 refers formally to the recognition of a GIC, it might be seen as actually referring to the time where a contract is to be recognized by grouping it (compare with IFRS 17.16 or 47). Accordingly, a contract is grouped at the latest when insurance coverage commences or the initial premium becomes due, but might be grouped earlier, if the contract turns out to be onerous. The guidance in IFRS 17 is to some extent circular, since IFRS 17.16 (a) refers to “onerous at initial recognition” while initial recognition is different according to IFRS 17.25 (c) if the contract is onerous. The definition of onerous contracts and how to identify onerous contracts for earlier grouping see 2.4.The recognition of a GIC might be understood to fall in two parts, first the initial establishing of the GIC at the date where the first contract is due to be grouped to the GIC and the ongoing formation of the GIC when further contracts are grouped to the GIC.2.3.2 Which guidance applies to forming groups of insurance contracts?IFRS 17.16 and 22 include minimum requirements for the refinement of PICs by GICs. IFRS 17.24 states: “An entity shall establish the groups at initial recognition, and shall not reassess the composition of the groups subsequently.” That might be seen having the consequence to have at a time GICs which are open for grouping additional contracts and GICs which are closed for new business and run off over time. 2.3.3 What is the meaning of the limitation to contracts up to one year apart?IFRS 17.22 determines: “An entity shall not include contracts issued more than one year apart in the same group.” This is often referred to as grouping annual cohorts of new business, since it determines a corresponding time limit. The reference to “issued” might be interpreted as referring to the date where the contract is actually recognized and accordingly grouped to the respective GIC. E.g. a contract issued on 15 December 2020 with a premium due date and commencing of coverage on 1 January 2021 might, if the entity forms GICs based on calendar years, belong to the annual cohort and the resulting GIC of 2020, if being identified as onerous on the issuance date, but to the annual cohort and the resulting GIC of 2021 otherwise.According to IFRS 17.21 the entity might consider to recognize a new GIC at any time for contracts to be grouped rather than grouping it to an existing GIC, be it by closing the existing GIC for new business or even by running both in parallel. That might be e.g. reasonable if the entity started a new tariff book era or varied otherwise the product or the pricing while contracts with the old conditions are still issued and grouped to an elder GIC. It might be as well possible to start GICs of onerous contracts in a non-simultaneous manner to other both categories of GICs, e.g. on 1st December of each year, to cover all onerous contracts with a starting date 1st January of the subsequent year.IFRS 17.BC138 last two sentences emphasize in this regard a general IFRS principle that IFRS might not be seen to prescribe techniques how to achieve the intended result complying with the guidance. Any technique producing the intended result of the CSM based on annual cohorts would be accordingly permitted, applying as well to the limitation in IFRS 17.22. The entity might consider to proceed the subsequent measurement of the CSM based on model points on a less granular level than the GICs, if the approaches apply approximate suitably the correct development and release of the CSM.2.3.4 What is the minimum differentiation for profitability?As minimum requirement of refinement in IFRS 17.16, each contract to be grouped would be checked whether it belongs to one of the three categories determined there. If the contract belong to IFRS 17.16 (a) the grouping date might be earlier than otherwise (see 2.3.1) which might even cause that the contract belongs to another annual cohort (see 2.3.3).2.3.5 How to allocate contracts to the categories of groups of insurance contracts at the grouping date?For grouping, IFRS 17.16 refers to three categories as defined in IFRS 17.16 (a)-(c), i.e. if it is identified to be onerous at the date of initial measurement (“onerous GIC”), to have no significant possibility of becoming onerous subsequently (“certain GIC”) or any other contract (“residual GIC”) – subsequently here referred to as “profitability categorization”. It should be noted that this categorization is relevant only at outset, the onerous GIC might be become later profitable and the certain GIC might become onerous. For subsequent measurement, there are simply GICs established in the past where the carrying amount of the prior period needs to be carried forward applying the recursive measurement approach.While the onerous and the certain GIC are defined positively, the residual GIC is defined negatively by exclusion. Under the requirement of faithful presentation, a positive definition might be seen as met if there is positive evidence that with a high likelihood the definition is met, especially if there is explicitly a residual category provided. Accordingly, if there is a significant likelihood that an individual contract might not meet the definition of the onerous or the certain GIC, the contract might be grouped to the residual GIC in such case of doubt. IFRS 17.17 indicates that the fact that a contract belongs to a set of contracts which just in average meets the definition of the onerous or certain GIC but not for each contract in the set, might be insufficient for grouping the contract on that basis.2.3.5.1 What is the meaning of the reference to individual contracts?To comply with IFRS 17.16, together with IFRS 17.17 last sentence, the profitability might be needed to be determined at the grouping date conceptually for each individual contract (see IFRS 17.BC129) at least to an extent needed to differentiate the three categories reliably since the grouping is applied for each contract individually. In some cases, such an individual assessment might be possible on a contract level, e.g. for large commercial contracts, where the individual risk exposure is analyzed in depth individually. However, typically insurers will not attempt to assess the risk exposure in full detail. They will choose a certain level of differentiation of contracts corresponding with the differentiation of assumptions as used in pricing for which statistical information is suitably available.2.3.5.2 When can the grouping be proceeded based on sets of contracts?IFRS 17.17 may be seen to permit to make the categorization decision for sets of contracts (cluster) together. The condition is that the “entity has reasonable and supportable information to conclude that a set of contracts will all be in the same” GIC. Background is that insurers usually do not assess the characteristics of contracts full individually but identify during acquisition some standardized pricing characteristics of each contract. Those identified characteristics determine the pricing and result in a partition of the new business in clusters, each containing contracts which are indistinguishable based on the standardized characteristics. Sometimes insurers might assess additional characteristics of contracts systematically, not needed for pricing, particularly personal information about the policyholder (not the necessarily the insured person or item) which might allow a further refinement of the clusters and on that basis narrow the range of the average assumptions to measure expected values for each cluster.However, IFRS 17.17 may be understood that the profitability categorization of a cluster into the onerous GIC and the certain GIC is only permitted if there is reasonable and supportable information that all contracts in the cluster, if they would be assessed individually, would as well be categorized accordingly. In some cases, the assessed characteristics permit to narrow the inhomogeneity in a cluster so far that even an individual risk assessment (e.g. a medical examination including family anamnesis and genetic test) would not result in a significant number of contracts in the cluster to result in a deviating profitability categorization. In other cases, reasonable and supportable information shows that the inhomogeneity in a cluster is significant and many contracts in the cluster would be demand a different profitability categorization. In the latter case, IFRS 17.17 could be understood to permit only a grouping of the entire cluster in the residual GIC, but not in any other.2.5.3.3 How to apply the grouping for individual contracts?In some cases, in case of particularly very large or unusual risks, the entity may have detailed individual knowledge about the risk permitting an individual assessment of the fulfilment cash flows. In other cases, the reasonable and supportable available information about a contract may allow to determine that mostly all contracts in a cluster formed by that information are within the onerous or certain GIC, due to the achieved homogeneity.If both is not given and the entity is unable to assess more reasonable and supportable information about the individual contract to reduce the inhomogeneity sufficiently, the entity may consider to allocate the contract to the residual GIC in absence of any positive information that the respective individual contract belongs to one of the other GICs. In difference to other accounting guidance, IFRS 17 might not be understood to permit that estimated percentages of a cluster are presented as being in the onerous or certain GIC to represent the inhomogeneity within the cluster but requiring a positive decision for each contract.However, IFRS 17.BC135 might be seen to permit generally an individual contract measurement of contracts based on the characteristics as applied in pricing. Background could be found in IFRS 17.BC119 in the objective to represent the quality of the entity’s decision of pricing which might reasonably be considered on the same level of information. Accordingly, the entity may consider to categorize individual contracts in the onerous GIC, if they are considering the same characteristics as in pricing onerous at outset.2.3.5.4 How to consider unsystematically available knowledge about contracts?Differentiations of measurement assumptions might be applied only based on systematically available characteristics of the contracts to be measured. If contracts with incidentally available more detailed insight in the risk exposure are excluded from the measurement on the general statistical basis, the statistical basis loses its reliability. Any unsystematic exclusion bears the risk of introducing a bias. Example: If agents in life insurance annuities are asked to forward information about insured persons if they are aware that their parents survived age 90, measuring those separately would impair the validity of mortality tables based on the entire population for the remaining contracts. The longevity would be overestimated but since it is not known how complete the information from agents is, it is not possible to determine the effect properly.2.3.5.5 How to consider regulatory pricing constraints?In some cases, insurers are prevented from differentiating premiums in a certain extent, particularly referring to specific classes of characteristics, e.g. gender, nationality or religion. If the knowledge about that restricted characteristic is available, both statistical experience and individual knowledge for the contract, some clusters could be assumed to be mainly onerous compared with premiums charged subject to regulatory limitations. IFRS 17.20 might be understood to require that in such cases the determination of grouping should be done applying a differentiation of assumptions which does not include the restricted characteristic. Accordingly, the average of the business regarding that characteristic would be considered for any contract. Except that, the entity might apply a differentiation of assumptions as without such a regulatory pricing constraint. Background is that there is neither a possibility nor a reason for such a differentiation in the transactions of the entity. Since the regulation applies to all other competitors as well, there is no risk of anti-selection and accordingly there is no reason for a costly further differentiation.However, if the regulation applies only for some of the competitors, anti-selection affects might need to be considered in estimating the average outcome for the characteristic to be ignored.IFRS 17.20 last sentence together with IFRS 17.BC133 and BC134 may be seen to prohibit that application of that guidance to cases where the entity is not actually forced to omit the differentiation for the specific characteristic. Cases where insurers avoid differentiation for characteristics without actually be forced to might be as prophylactic measure against development of such regulations, to have consistent pricing throughout in areas of activity without such restrictions with areas of activity with such restrictions, or to protect its reputation. 2.3.6 What is the meaning of becoming onerous in future?IFRS 17.16 (b) refers to the “possibility of becoming onerous subsequently”. A GIC becomes onerous according to IFRS 17.48 in subsequent measurement, if the CSM is exhausted. IFRS 17.16 (b) might be understood to refer to the situation where the contract to be grouped is the sole contract in the GIC. Onerous does not mean that the cash outflows of a contract exceed over the entire contract duration the cash inflows, i.e. a contractual deficit arises. “Onerous” is specifically defined in IFRS 17 referring only to the development of the CSM (see x.x.x).Accordingly, only future changes which can exhaust the CSM can cause that a contract becomes onerous in that sense. A loss under a contract due to the incurrence of an insured event (experience adjustment) or due to changes in financial risk would not cause that the contract becomes onerous (except if the experience adjustment or change in financial risk adjusts the CSM in case of a direct participating contract, see IAN Participating Contracts). Hence, it is necessary to anticipate whether future changes in estimate or other events adjusting the CSM are likely to cause that the CSM is exhausted at any time during the coverage period. Accordingly, just changes in estimate for future non-financial risk can cause a contract to become onerous. The chance to become onerous depends as well on the release pattern of the CSM, i.e. which CSM is available when adjustments incur.2.3.7 What is a significant risk in that context and how is it identified?IFRS 17.19 provides further guidance for grouping a contract as “no significant possibility of becoming onerous”. Accordingly, an assessment might be necessary about the volatility of assumptions in future measurement which adjust the CSM. Basis of this decision may be the information available in entity’s internal reporting. Internal reporting may be understood as any internal flow of information which provides management with insight to economic processes of the entity. That may include information about the pricing process and considered data and assumptions there, underwriting, contract administration and claims settlement. If the entity becomes aware having all that information that there is a significant possibility of becoming onerous, the entity might group the contract, which is not onerous, in the group described in IFRS 17.16 (c). IFRS 17 refers to entity’s internal reporting, while e.g. IFRS 17.B37 refers to “own information systems”. That may be seen to indicate that there is no requirement to consider any information available, particularly electronically, but only those information which are actually forwarded to management by means of the internal reporting. The entity might not need to gather additional information or to expand existing internal reporting for the purpose of grouping (see IFRS 17.BC130).The possibility of becoming onerous in future is referring to the probability of the event. The meaning of significant possibility should not be interpreted as in the case of “significant insurance risk” in IFRS 17.B18, where already an “extremely unlikely” event may be assumed to be significant. Some believe that significant should be determined in absolute terms applicable for all products, others would see it merely depending on the volatility of the assumptions of a product, i.e. for products with a very high volatility the threshold of the group described in IFRS 17.16 (b) should be lower than elsewhere. However, since becoming onerous is a complex combination of many assumptions, particularly representing the risk that future circumstances change, the ability to estimate the probabilities properly might be limited in any case. Accordingly, it is merely an issue of judgment and clear percentage limits might not actually be helpful.2.4 When might it be appropriate to determine groups of insurance contracts on a more granular level than prescribed?IFRS 17.21 permits to apply a refinement of the GICs as required by IFRS 17.16 and 22. A reason might be, that there are particularly in the onerous GIC or in the GIC with significant possibility of becoming onerous distinct pricing differences and the entity might wish to hold them separately, e.g. since one part of onerous contracts, which is due to pricing just slightly onerous, might so more easily become profitable again (see IFRS 17.21 (a)). The guidance in IFRS 17.21 (a) and (b) is an example.If an entity believes that the objectives of IFRS 17 could be met as well by measuring the CSM on a single contract basis, it might recognize for each contract a separate GIC in expanding IFRS 17.21 to an extreme, but as well the normal application of IFRS 17.14-20 may have the result that GIC includes only one contract. Particularly in case of reinsurance assumed or commercial lines, this may be sometimes a reasonable outcome. The wording of IFRS 17.23 might be read that the guidance of IFRS 17.14-22 is a merely objectively determined result. But at least due to IFRS 17.21 the entity might be seen as having the unlimited choice to apply any refinement of the level prescribed.2.5 How are contracts added to an existing group of insurance contracts?While usually “recognition” means a single event within a reporting period, the establishment of a GIC can be a process spanning up to a year. IFRS 17.44 (a) and 45 (a) refer to the effect of contracts newly grouped to an already existing GIC still open for new additions. Further guidance is provided in IFRS 17.B23. See x.xx.x for further details.The classification of GICs according to IFRS 17.16 is relevant only for the forming of the GIC. The historic classification of a GIC has no relevance for the subsequent measurement of the GIC. There is no difference in subsequent measurement, e.g. the onerous GIC is treated equally to another GIC which became onerous later or if the onerous GIC becomes profitable later, it is treated as any GIC which was profitable at all times.However, the classification may be relevant for the ongoing formation of the GIC, as long as it is open for new business. The original classification of the GIC determines the allocation of new contracts. That could mean in the extreme, that a partially formed GIC of the class in IFRS 17.16 (c) is in the meantime onerous but nevertheless still contracts to be classified in IFRS 17.16 (c) might be added, or vice versa, the onerous GIC is in the meantime profitable but still onerous contracts are added. That might provide an indication that closing the GIC and opening a new one might be recommendable.It is necessary to differentiate the addition of newly issued contracts to a GIC open for new business and any addition of contract parts to a GIC since cash flows cross the contract boundary of contacts already within the GIC. The addition of a newly issued contract incurs based on the initial measurement of the FCF and the effect is added to the CSM of the GIC. Since the initial measurement incurs based on the circumstances, particularly financial circumstances at initial measurement, the financial environment in the GIC and the CSM of the GIC is modified. Accordingly IFRS 17.B73 requires to adjust the historic rate as of initial recognition of the GIC for the added newly issued contract. A later addition of a contract part due to cash flows crossing the contract boundary would be considered like a change in accounting estimate and would adjust the CSM based on the historic rates as finally fixed at the fixing of the GIC when it is closed for new business. As a consequence, cash flows crossing the contract boundary could result in an immediate financial gain or loss. That might be seen particularly as questionable if the cash flows crossing the contract boundary are not priced consistently with the original contract but at prevailing rates at that time. In that case, it might be considerable to treat such cash flows as a new contract to be added to a GIC open for new business.Chapter III Liability for remaining coverage and coverage period3.1 Which Items Require the Addition of a CSM?The liability for the insurance contract is split in the liability for remaining coverage and the liability for incurred claims (IFRS 17.40). The CSM is a part of the liability for remaining coverage (IFRS 17.40 (a) (ii)) and determined exclusively based on that part.If a contract refers already at outset to events incurred in the past, e.g. in case of retroactive reinsurance, coverage refers to the settlement of the consequences of those events, i.e. the respective liability is a liability for remaining coverage. 3.2 What is the coverage period and the coverage unit?IFRS 17 requires to recognize that part of premiums which is presented by the CSM in revenue as services are provided. As simplification, the relevant services for recognition are limited to coverage services, i.e. services representing the release from insurance risk accepted under the contracts of the GIC. Accordingly, a CSM exists and is released over the time where the insurer expects to be released from insurance risk under the contracts in the GIC. This is further specified by requiring a release based on coverage units, which are quantifications of the coverage provided in the period. Accordingly, the relevant coverage period as release period of the CSM is the period in which the insurer expects to be obliged to provide coverage units. If the insurer does, at the end of a period, not expect to provide any coverage unit in future for a GIC, the formula of releasing the CSM results in a full release of the carrying amount of the CSM of the GIC at that time. Nevertheless, the insurer might be obliged to provide other services in future and to pay cash flows if events, other than insured events, incur, and accordingly there is a LIC representing the liability for future services, which is not limited for simplification to coverage services. Accordingly, the LIC continues but without any CSM (or loss component) and any change in estimate is immediately presented in P&L. However, if subsequently the entity develops an expectation again that under the GIC coverage units will to be provided in future, there might be in future a CSM. The past CSM is not restated but the procedure regarding changes in estimates is from that time on equal to the case where coverage units where expected without any gap to be provided from outset on but it was incidentally zero at that time, i.e. any adjustment qualified to adjust the CSM would either from a new CSM or result in a loss component.3.2.1 In case of lacking clarity what in a sequence of events is actually the insured event?The insured event which completes a coverage service with subsequently only settlement of claims incurred is usually clearly determined by the contract. However, in some cases a sequence of events is needed before the adverse effect requiring a compensation is actually clear. For example, in third party liability insurance, a person subject to a personal injury might suffer further complications increasing the amount due. Usually the possibility of such subsequent events, modifying the effect of the causing original insured event, would be seen as part of settlement, not being coverage. In other cases, e.g. stop loss reinsurance or joint life insurance, a sequence of independent events might trigger the incurrence of an obligation to provide a compensation. Here, such events would be seen as part of coverage until and beyond an obligation to provide compensation is actually triggered. Is might be seen as a difference, whether a sequence of events is, as in the latter case, is a coincidence of merely independent events or as in the first case, the subsequent events are consequences of the first event clarifying only the severity of the adverse effect of the first event.Further, events may trigger subsequent services, particularly coverage. Some services, e.g. medical treatment or car repair, would be considered as benefits in kind (IFRS 17.B6) as far as they do not include insurance coverage services. Providing such services would not have any effect to the coverage period. In other cases, the services to be provided as compensation for incurred insured events are qualified as insurance coverage, i.e. they would be insurance contracts in the scope of IFRS 17 if they would have been acquired stand-alone. Examples are life- and disability-contingent annuities paid as benefit for the insured person of disability insurance contracts or sometimes on request of a court to the victim in case third-party liability insurance contracts. A decisive difference might be seen in the fact, whether the subsequent coverage is already specified by the insurance contract as in disability insurance or whether it is a consequence from the incidental peculiarities of the insured event as in third-party liability insurance. The first case might be seen as providing contractual coverage services, i.e. representing a LRC with the duty to consider a CSM and release it over the duration of coverage. The treatment would be consistent with the treatment of an annuity agreed to be paid after the insured person survived a certain date. The latter case would be represented by a LIC since it is not contractual coverage but an extended settlement due to the remaining uncertainty of the total volume of adverse effect of the original insured event. Annuity rates in those case could be understood as installment payments of the compensation. 3.3.2 What is the start and end of coverage periodThe coverage period, as far as relevant for the release of the CSM, is directly connected with the identification of coverage units in the periods as defined in IFRS 17.B119. Due to choosing coverage units as basis of release of CSM, the release of the CSM in a period, and accordingly as well its start and end, is determined based on the coverage units. E.g. if a transport insurance starts with paying the premium, but the first transport incurs in the subsequent period, the number of coverage units, e.g. transports per period, is in the first period zero and accordingly no release is recognized. If after some time the sum under risk of an endowment insurance is zero since the accumulated funds exceed the sum insured, the planned release pattern results in zero CSM at that date due to the final release in the period where the sum under risk becomes zero. The projection of the release of the CSM is based on expected future coverage units and accordingly as well uncertainty regarding end of coverage does not cause issues. As well interruptions of coverage would be considered by the lack of coverage units provided in the respective period.3.3.3 How to identify coverage units as an appropriate quantification of certain types of coverage?Coverage units should quantify the coverage service to the policyholder by other means than the already considered economic value of the coverage in the FCF. It is used to describe proportion between coverages provided in different periods of contract within one GIC. In some cases, where the coverage can be quantified from policyholder’s perspective, e.g. in life insurance with sum under risk as a quantification of coverage, the quantification might be self-evident. As well in cases, where a clearly standardized coverage is present, the number of contracts would be sufficient to describe the proportions of quantities of coverage, e.g. in case of consumer third party liability insurance with the same coverage limits. In other cases it might be more judgmental how to quantify, at least in proportion, coverage.Chapter IV: Determination of CSM4.1 How is the CSM Determined at Initial Recognition and Measurement of an Insurance Contract?The initial determination of the CSM is guided by IFRS 17.38. Accordingly, the initial CSM is the absolute values of the negative outcome of the sum of the fulfilment cash flows (IFRS 17. A) of all contracts in the GIC and any cash flow within the contract boundary incurred before initial recognition (subsequently referred to as pre-recognition cash flow), cash outflows with positive, cash inflows with negative sign. While the fulfilment cash flows as in normal measurement consider only future cash flows, the inclusion of the pre-recognition cash flows completes the considered cash flows to all “cash flows within the contract boundary” according to IFRS 17.B61-B66 at the recognition date disregarded whether paid in the past or might be paid in future. In so far, in case of a profitable contract, the outcome of measuring all cash flows should be negative (total cash outflows minus total cash inflows), i.e. representing an asset (a resource) of the entity. This asset is eliminated by the creation of the CSM as an additional part of the measurement of the insurance contract, resulting in an amount of zero at a fictive time before any cash flow incurred. However, pre-recognition cash flows, if any, cause that the amount actually recognized at that time is not zero but equals the considered value of pre-recognition cash flows, an asset if pre-paid acquisition cost exceed pre-paid premiums, a liability otherwise. Consideration of pre-recognition cash flows serves only for determining the CSM initially since it should reflect the entire contract, disregarded already pre-paid amounts at recognition date.If the so defined initial amount is positive rather than negative, an insurance contract liability in that amount is recognized at initial recognition and simultaneously a loss from the contract is recognized in comprehensive income at the same amount (IFRS 17.B47). Due to the definition of GICs in IFRS 17.16, that applies either to all or none of the contracts within each GIC. Since all pre-recognition cash flows are to be considered in the measurement of the initial fulfilment cash flows, any initial loss is presented explicitly as such, not, as often usual in other accounting systems, by recognizing insurance acquisition cash flows immediately to reflect the loss. However, the presentation under IFRS 17 does not indicate that those cost are causing the loss but the entire contract.The CSM is determined for each insurance contract in the GIC in its entirety as recognized, i.e. without considering separated parts but including any rider which is part of the contract (AP 2H April 2012, see IAN Contract Classification). Simplifications, e.g. a separate treatment of riders or other contract parts like policy loans might be possible if the outcome is materially the same. The CSM is calculated for all insurance contracts in the GIC together, but, since the insurance contracts in the GIC have either all a CSM or none, the CSM of the GIC equals at initial recognition the sum of the CSMs if calculated for each single insurance contract in the GIC. Accordingly, the initial calculation can be done on the level of the GIC or at any lower level, e.g. if for purposes of grouping the entity had calculated the CSM of such a lower level already. Many assumption, are usually broken down by applying keys (averages) to individual insurance contracts, e.g. administration cost per piece.. Benefits are usually determined based on averages (e.g. mortality rates), which as well can be applied to single insurance contracts. As well the risk adjustment, representing the value of the risk of the single insurance contract to the insurer given the considered pool for risk mitigation, can be broken down with the same averages to the single insurance contract.4.1.1 What are pre-recognition cash flows beyond Insurance Acquisition Cash Flows?For simplification, IFRS 17 refers regarding pre-recognition cash flows to insurance acquisition cash flows only. However, there may exist often other pre-recognition cash flows, e.g. pre-paid premiums, and those may need to be considered as well. The reduction to insurance acquisition cash flows was not intended to exclude other pre-recognition cash flows from consideration.Pre-recognition cash flows will particularly include premiums under the contract paid prior to the recognition date, e.g. those paid in advance, and commissions spent due to contractual obligations with an intermediary in response to writing the contract. However, both will usually not be due earlier as the contract is recognized, i.e. the due date of the premium at the latest.In some jurisdictions it is common that policyholders prepay a part or all of the (present value of) future premiums under an insurance contract and interest is accreted on the prepaid amount. However, such a prepayment might not be considered a pre-recognition cash flow if it is either paid under a legally separate contract or the prepayment is separated as investment component (see IAN Contract Classification).4.1.3 How are pre-recognition cash flows recognized and considered in initial measurement?IFRS 17.27 provides guidance regarding insurance acquisition cash flows incurring before the GIC of the related are recognized. The guidance might be extended to any pre-recognition cash flow. They may be recognized as asset in case of cash outflows or as liability in case of cash inflows. These items might be derecognized and immediately considered in the measurement of the contract in the GIC when the GIC is recognized. This results in a need to associate the incurred pre-recognition cash flows to a GIC. For example, underwriting cost incurred in December would need to be split between insurance contracts already recognized in December and those which will be recognized in the subsequent year. Practitioners often tend to allocate such cost to the contracts recognized in the same reporting period. But that might not always be appropriate and a more sophisticated approach might be needed. The reference in IFRS 17.27 to “issued” contracts, might not be understood to exclude pre-recognition cash flows related to contracts which were not yet issued at the reporting date from being recognized as asset or liability under IFRS 17.27. However cost incurred by the entity without any related process of acquiring and issuing a contract might often not be seen as cash flows directly attributable to a specific PIC.Pre-recognition cash flows are in the most trivial case just added to the fulfilment cash flows at initial measurement and the outcome determines the CSM. That is the case if the pre-recognition cash flow is actually a cash flow occurring shortly before, particularly within the same accounting period as recognition of the contract to which the pre-recognition cash flows is associated (the “related” contract). In more complex cases, the practitioner might consider adequate measures to cope with the complexities. Pre-recognition cash flows may occur some considerable time before the related contract is recognized, which might raise the question whether time value of money might be considered.In some cases, the pre-recognition cash flows are not actually cash flows but cash flow equivalents (see IAN Estimates of Future Cash Flows). In that case, the cash flows equivalent might be represented by the consumption of an asset recognized earlier under another IFRS. The releasing of the asset might be in that case seen as the pre-recognition cash flow and result in the recognition of the respective asset under IFRS 17.27 without affecting P&L.4.1.4 How is the CSM determined initially in case of contracts acquired by means of business combination or portfolio transfer?See IAN Business Combination.IAN 6 Contractual Service MarginChapter VI: Subsequent Measurement - Adjustments6 Why is the CSM adjusted and how?The CSM of a GICS at the end of each period represents the profit from the contracts in the GIC as far as related to remaining future (coverage) services. For this purpose, the CSM is in each period released at the proportion as the entity provides such services in that period. However, in each period, the profit from future services might change due to changes in fulfilment cash flows for future services. To represent nevertheless the profit as described before, the profit needs to be adjusted for those changes in FCF. For this purpose, IFRS 17 distinguishes between current and past services, with the related changes in current cash flows, and future services, with the related changes in FCF for future services. Only the latter would adjust the CSM.IFRS 17 differentiates further between events in the current period or in past periods which may affect the provision of current or past services but as well directly affect the volume of future services (experience adjustments) and changes in measurement assumptions due to changes in circumstances which cause that the entity changes its perspective of the value of future services (change in estimate). Both, experience adjustments and changes in measurement assumptions can affect the FCF for future services (the first by affecting the volume, the second affecting the value of future services), i.e. change the estimates of future e and accordingly both adjust the CSM in so far, excluding any affect experience adjustments to current or past services.Accordingly, if policyholders pay more or less premiums for future services than expected this results in more or less FCF for future services than expected. Both, with opposite algebraic sign, and accordingly the net amount (i.e. the profit margin in the more or less paid premiums) adjust the CSM. That is the consequence of IFRS 17.B96 (a) and (b) together. If other current events cause that more or less volume of future services than expected remains, e.g. due to more or less contract terminations, the related deferred revenue from past premiums as considered in the FCF is not affecting immediately revenue by presenting less or more revenue than expected, and accordingly affecting profit immediately, but adjusts the recognition of revenue over the remaining coverage period of the GIC. That does not apply, if the amounts would not at all affect revenue and not related to future services since they are investment components and identical less or more payments incur in the current period. In that case, IFRS 17.B96 (c) requires an correcting adjustment to the CSM eliminating as far the adjustment applied due to IFRS 17.B96 (b).6.1 What qualifies for adjusting the CSM?Items that qualify for the adjustments of the CSM under the general model are changes in fulfilment cash flows relating to future services, including:Changes in estimates of the present value of cash flows, without considering changes in discount rates or financial risk (see 6.2) according to IFRs 17.B26 (b)Experience adjustments arising from premiums received in the period that relate to future coverage and other services (see 6.2.3) according to IFRs 17.B26 (a)Changes in risk adjustments for non-financial risk relating to future services (see 6.3) IFRS 17.B26 (d) andas correction of the amount considered according to IFRS 17.B26 (b) the included differences arising from investment components expected to become payable in the period and the actual investment components that become payable in the period (see 6.4) according to IFRS 17.B26 (c), since that part of the changes in estimates of future cash flows does not refer to future services.further adjustments in case of ICDP according to IFRS 17.45 (b) (see IAN Participating Contracts)There is some special guidance in IFRS 17.66 (c) (ii) for a reinsurance contracts hold, if the corresponding adjustment of the ceded contracts does not adjust the CSM there (see Reinsurance Contract IAN).The above list does not apply to cash flows or assumptions relating to the liability for incurred claims since it refers to past service only (Refer to section 2.2 for the non-applicability of CSM to the liability of incurred claims, IFRS 17.B97 (b)). It also does not apply to the impact of changes in market variables in insurance contracts or direct effects of changes in the discount rate and financial risks. Changes in the latter are immediately recognized in the statement of comprehensive income under insurance finance revenues or expenses (IFRS 17.B97 (a)). 6.2 Why is the CSM adjusted for changes in estimates and how?The CSM is set up at the inception of a group of contracts on the principle that future profits should not be front-ending. To the extent that expected future profitability changes due to changes in estimates; the CSM should be representative of anticipated risk-adjusted profits embedded in expected future coverage and other services: Changes in estimates of cash flows affect the future profitability of the group of insurance contract. Thus, adjusting the CSM to reflect these changes provide a more faithful representation of the remaining unearned profit in the contract after inception.Adjusting the CSM avoids the counterintuitive results of a locked-in CSM. Under a locked-in CSM, immediate recognition in profit or loss of unfavorable changes in estimates can make groups of contracts that are profitable overall to be loss-making in the years the changes are made, while the locked-in CSM would be sufficient to absorb that loss. Conversely, it can also make GICs that become loss-making overall appear to be profitable since a CSM would continue to be released.Adjusting the CSM also increases consistency between measurement at inception and subsequent measurement. At inception the recognition of gains in profit or loss are prohibited, on the basis that profits are earned over the period the service is provided (the coverage period). To be consistent with the measurement at inception, subsequent favorable or unfavorable changes should also not be recognized in profit or loss because those “profit” adjustments are for the entire period of service.6.2.1 How to differentiate future cash flows related to future services from other cash flows?Cash flows can be attributed to past, current or future time periods. However, adjustment of the CSM applies only to cash flows related to future services. In order to determine whether cash flows are attributed to future time periods, the actuary should first determine whether the cash flows are attributable to the liability for incurred claims or the liability for remaining coverage.All changes in the liability for incurred claims relate to current or past service because they relate to coverage in previous periods or the current period. Therefore, a change in value of incurred claims to be settled in the future should not adjust the CSM as this is related to current or past service, even though it refers to future cash flows.Cash flows attributable to the liability for remaining coverage are generally considered as part of future services. However, differences between the claims and expenses that were expected to happen in the period and the actual amounts incurred are considered as part of current or past services and therefore, do not adjust the CSM. Further, investment components in the LRC do not refer to future service and the adjustment of the CSM for changes in FCF due to experience adjustments (IFRS 17.B96 (b)) are therefore corrected for any included change in investment components (IFRS 17.B96 (c)). The considered change in FCF includes any change in volume of future services due to events incurred in the current or prior periods (experience adjustments which change the volume of future services). 6.2.2 Which changes in estimates of cash flows qualify for adjusting the CSM?The table below summarizes how components underlying the fulfillment cash flows should be treated for contracts measured under the general model:Adjust CSM?Change in estimates of incurred cash flows for past coverage (liability for incurred claims)NoExperience differences on current period cash flows:claims, expensesNoExperience adjustments on current period cash flows: premiumsYesChange in present value of cash flows related to the liability for remaining coverage due toChanges in assumptionsYesExperience adjustments (except investment components)YesChanges in pricing information (ex: age, sex)YesContract feature changes (premium pattern, face amount, etc.)YesChange in market variables, discount rates or financial riskNoChange in underlying items, if applicableYesRisk adjustment for non-financial risks relating to future servicesYes6.2.3 What is the difference between changes in estimate of future cash flows and experience adjustments in the current period?Experience adjustments in the current period are defined as (a) differences between the premium receipts (and related FCF) that were expected to happen in the period and the actual cash flows or (b) differences between incurred claims and expenses that were expected to happen in the period and the actual amounts incurred. Thus, experience adjustments refer to the deviations of the incurred cash flows from expected cash flows for the current period. By analyzing the experience adjustments, the actuary should treat differently adjustment due to premium receipts for future services since these experience adjustments relate to future services and therefore adjust the CSM accordingly. In general, experience differences in the current period can alter service to be provided in future period, resulting in adjustments to future cash flows. For example, lower than expected contract termination for a given period will lead to a higher number of contracts to which services will be provided in future periods. The re-estimation of fulfillment cash flows and the revised expectation of future services would adjust the CSM accordingly.Similarly, past and current experience may change the actuary’s view of the future. For instance, recurring gains from lower historical and current terminations may result in a change to future termination assumptions, which would also result in an adjustment to the CSM. 6.3 Why is the CSM adjusted for changes in estimate of the risk adjustments for non-financial risk and how?The risk adjustments for non-financial risk is the compensation that an entity requires for bearing the uncertainty of the group of insurance contracts. It has, therefore, a direct impact on the GIC’s profitability. Variances in expected future profits as a result of changes in risk adjustments for non-financial risk are therefore reflected in adjustments to the CSM consistently with the principles discussed in section 6.2:The CSM adjustment permits a homogeneous treatment with the cash flows to which the risk adjustment relates to. Since the CSM is adjusted for changes in estimates of future cash flows of the GIC, it should also be adjusted for changes in estimate of the risk adjustments for non-financial risk for future periods. Since the CSM at inception represents the risk-adjusted profit for the contracts of the GIC to be earned as the services are provided in the future, adjusting for changes in the risk adjustments for non-financial risk ensures consistency between inception and day two of the contract. Adjusting the CSM for changes in risk adjustments for non-financial risk should be done consistently to cash flows to which it relates to. This implies that:The CSM should be adjusted for changes in risk adjustments for non-financial risk relating to services provided in future periods, subject to the condition that the CSM should not be negative.Changes in the risk adjustments for non-financial risk as determined in the prior period to be represent the compensation for the non-financial risk expected to be born in the current period should be recognized in profit or loss.When measuring the change in the risk adjustments for non-financial risk, entities have the option to disaggregate changes relating to the coverage of current or past periods between the insurance service result and insurance finance income or expenses. If no disaggregation is made, the risk adjustments for non-financial risk is seen as an explicit measure of the uncertainty of timing and amount. Therefore, the adjustment of the CSM would capture all movements of risk adjustments for non-financial risk underlying the present value of the future cash flows. However, if a disaggregation is made and the entity is able to derive an impact of time value of money and changes in discount rates, this impact would be ignored in the CSM adjustment (similarly to the impact of changes in market variables on the present value of future cash flows), and presented in insurance finance income or expenses. While the risk adjustment might be implicitly affected by the time value of money in the view of the entity or of the market, it is not explicitly a present value. The consideration of timing is an integral part of the entity-specific determination. There is no conceptual requirement that the considered time value of money is in line with market variables. Accordingly, as well effects of changes of the time value of money as included by the entity in the consideration required for bearing risks in future adjust the CSM since they are related to future risk and the change does not represent changes in markets.6.4 Why is the CSM adjusted for differences arising from investment components expected to become payable in the period and the actual investment components that become payable in the period?Investment components, defined as “the amount an insurance contract requires the entity to repay the policyholder even if an insured event does not occur”, are treated differently from other components of insurance contracts. Even though no distinction is made in the measurement of fulfilment cash flows for non-distinct investment components, insurance revenue and incurred claims exclude the repayment of all investment components as this does not depict transfer of insurance services. For example, lapse events for a group of insurance contracts may trigger the repayment of investment components. Under these circumstances, no additional coverage or insurance service was provided following this event and thus, insurance revenue and insurance service expenses are not adjusted to reflect this occurrence. Adjusting the CSM for differences between actual and expected investment components to be paid in the period offsets the impact of the change of the estimates of the present value of cash flows captured through the adjustment according to IFRS 17.B96 (b), which does not include a restriction to future services and accordingly includes both, changes in discount rates and financial risk, explicitly excluded by IFRS 17.B97 (a) and changes in investment components compared with expectations, explicitly rewound by IFRS 17.B96 (c). 6.5 How is the CSM adjusted?Adjustments to the CSM are measured by calculating the present value of expected future cash flows and risk adjustments for non-financial risk subject to adjustments of the CSM, before and after changes. When adjusting the CSM, the entity would:Increase the CSM as a result of favorable changes in the risk adjustments for non-financial risk and in the current and previous estimates of the expected present value of cash flows relating to future services.Decrease the CSM as a result of unfavorable changes in the risk adjustments for non-financial risk and in the current and previous estimates of the expected present value of cash flows relating to future services. However, the CSM in the statement of financial position cannot be negative. Questions 6.4.1-6.4.3 provide additional details on how the loss component (i.e. negative CSM) should be treated.Adjust the CSM to reflect experience adjustments arising from premiums received in the period that relate to future services and related cash flows such as insurance acquisition cash flows and premium-based taxes. If more (less) premiums than anticipated are received, the CSM would be increased (decreased) accordingly. As a consequence with the prior adjustments, the profit from any more or less future services acquired by more or less premiums would adjust the CSM to avoid immediate recognition of such profits.Adjust the CSM to reflect differences between investment components expected to become payable in the period and the actual investment components that become payable in the period. If more (less) investment components than anticipated become payable, the CSM would be decreased (increased) accordingly, eliminating the effect by the prior increase (decrease) due to IFRS 17.B96 (b).Not adjust the CSM for changes in cash flows relating to past/current services. These changes in estimates would be recognized in profit or loss in the period when the change is known. That includes particularly any change in the LIC but as well changes in discount rates and financial risk in the LRC.The discount rate used for interest accretion in the CSM should also be used when adjusting the CSM for changes in the present value of expected cash flows relating to future services. The discount rate used for adjustment should be the same for all cash flows of the GIC. However, the re-measurement of the CSM should consider the actual change in Risk Adjustment for non-financial risk, if the time value of money is considered implicitly; it is not re-measured using the CSM locked-in discount rate. The reason is that the discounting is viewed as an integral part of the Risk Adjustment for non-financial risk.Examples:IFRS 17.B96 refers to several adjustments of the CSM. That means, if A is the CSM before adjustments (after accretion of new business and interest) and B is an adjustment as defined in IFRS 17.B96 (a)-(d), the adjusted CSM is A + B.Assume FCF at end of year X-1 is 1,000, the estimate of FCF for cash flows beyond end of year X at end of year X-1 to be 900 due to an estimated payout in year X of 100.Assume the CSM at end of year X-1 is 200 and remaining unchanged to end of year X (assume there is no coverage provided in year X, hence no release).Interest and risk adjustment are assumed to be zero.Accordingly, the total liability at end of year X-1 is 1,200, and expected to be 1,100 at end of year X.Example 1: Additional, unexpected premium in period XIFRS 17.B96 (a): Assume the expected premium receipt was zero, but the policyholder paid voluntarily 100. The additional premium payment (which was beyond the contract boundary at begin of the year) causes additional future expected cash outflows of 90 (which results in an adjustment according IFRS 17.B96 (b)). Here it is necessary to consider that premiums are receipts and therefore considered in accounting to be negative amounts. The adjustment (B) is here (-0) – (-100) = 100. The CSM increased by 100, i.e. it is after this adjustment 300.IFRs 17.B96 (b): The resulting increase of the FCF is 90. The adjustment (B) is accordingly the expected FCF of end of year X as expected at end of year X-1, 900, minus the actual FCF at end of year X, 990, i.e. the adjustment is -90 and that is added to the CSM, reducing the CSM to 210 after the prior adjustment under IFRS 17.B96 (a). Accordingly, the net profit from the additional premium of 10 increases the CSM applying IFRS 17.B96 (a) and (b). Accordingly, the total liability is increased by 100 off-setting the premium receipt of 100.Example 2: The actual payout in year X is lower than expectedThe actual payout is 30 instead of the expected 100 and the actual FCF at end of year X for future years is 970.Applying IFRS 17.B96 (b), the change in FCF is the expected amount at end of year X as expected at end of year X-1, 900, minus the actual FCF at end of year X, 970, which equals -70. The CSM need to be decreased by 70. The movements of the FCF are, starting from 1,000, reducing it by 100 for the expected payout, increasing it by 70 for increased future benefits compare with expectation, resulting in a FCF of 970. The CSM of 200 is decreased by the increase of the FCF of 70, i.e. it is 130 after adjustment. The total liability, which was expected to be 900 + 200 = 1,100, is now 970 + 130 = 1,100, remains unchanged. In P&L, an insurance service profit is presented of 100 revenue minus 30 expenses, equals 70.However, the fact that the reduction in payout results in an equal increase of the FCF may indicate that the 100 expected payout is an investment component. Accordingly, the 100 would not have been presented as revenue in P&L, and the 30 not as expense. But this fact requires to apply as well IFRS 17.B96 (c) in addition to the prior step under IFRS 17.B96 (b), i.e. there is an additional adjustment to the CSM, which corrects the decrease of the CSM of IFRS 17.B96 (b). The experience adjustment deferred a repayment of an investment component, planned for the current year, to a future year. Accordingly, the total liability needs to be higher than expected in the amount of the deferred payout of the investment component. That means, the total liability should not be 1,100 but 1,170. The CSM should be unchanged since there nothing happened affecting services, i.e. it should remain to be 200 as end of year X-1 and the new FCF is 970.IFRS 17.B96 (c) refers to the “differences between any investment component expected to become payable in the period [here this is 100] and the actual investment component that becomes payable in the period [here this is 30]”, the difference, the adjustment B, is here accordingly. 100 – 30 = 70. The adjusted CSM applying IFRS 17.B96 (c) would be (considering that there was already an adjustment according to IFRS 17.B96 (b)): 130 (prior CSM after adjustment for IFRS 17.B96 (b)) + 70 (Adjustment according to IFRS 17.B96 (c)) results in an adjusted CSM of 200. Accordingly, the total liability would be 970 + 200 = 1,170.Example 3: Increase of the risk adjustmentIt was assumed for simplification, that the liability does not include a risk adjustment. Now, assume a risk adjustment of 100 is introduced. That means, the adjustment (B) according to IFRS 17.B96 (d) is 0 – 100 = -100. Accordingly, the CSM is reduced by 100, i.e. 200 -100 = 100, the FCF, now increased by 100 is 1,000, the total liability remains unchanged 1,100.Overall, the need to measure adjustment based on the historic financial situation at initial recognition of the GIC (average-weighted over the time where the GIC is open for new business) results that the entity might need to calculate the FCT at any time twice, once for determination of its carrying amount in the Statement of Financial Position applying the current financial situation regarding time value of money (discount rate) and financial risk and a second time applying the historic financial situation which is locked-in in the CSM and all its movements.What happens if the cash flows considered in measurement of the FCF change due to parts of contracts now to be considered in measurement?That applies to cash flows crossing the contract boundary (IFRS 17.B64 last sentence), if a cedant adds further ceded contracts to a covering reinsurance contract due to issuing them (IFRS 17.62 (a)) or due a contract modification according to IFRS 17.73. The change is measured as change in estimate, i.e. the FCF is considering now as well those cash flows at current assumptions, while the CSM is changed based on the initial measurement of the change applying historic interest rate and financial risk assumptions. The net effect of the change in FCF and CSM is presented as insurance financial revenue or insurance financial expense.6.5.1 What happens if the adjustment causes the CSM to become negative?When the CSM becomes negative in a reporting period, the CSM is fully derecognized in that period, i.e. set to 0. Any excess amount from the unfavorable adjustment is set as a loss component and reported in Profit & Loss as a loss in that period. 6.6 Loss component6.6.1 What happens subsequently to the CSM becoming negative?Once a loss component is recognized, it needs to be tracked in subsequent periods to determine if a CSM needs to be reset in the future. Changes in the liability for remaining coverage arising from changes in fulfilment cash flows relating to future services would adjust the loss component as they would adjust a positive CSM. That applies as well regarding the application of the historic interest rate. It might be seen reasonable to accrete as well this interest on the loss component.If favorable changes in estimates of the liability for remaining coverage were to result in a loss component of zero, the CSM is reinstated in the statement of financial position. The difference between the loss component at the beginning of the reporting period and 0 is reported in Profit & Loss. The amount of the favorable changes in estimate in excess of the loss component at the beginning of the reporting period is equal to the newly reinstated CSM.6.6.2 What happens if the contract was onerous already at outset?A loss component would need to be tracked in order to reflect the loss at inception. Future favorable changes in estimates would be recognized as profit until the loss component reaches zero. I.e. the same applies as if the CSM had become negative in subsequent measurement.Chapter VII: Other issues7.1 How is the CSM Determined in Case of changes of contracts in the Group of Insurance contracts? 7.1.1 Initial recognition of contracts belonging to an existing Group of Insurance ContractsAs long as a GIC is open for new business, according to IFRS 17.22 not longer than 12 one year, any addition of a newly issued insurance contract incurs at its recognition date as determined by IFRS 17.25 (actually referring to the date of adding a newly issued contract to a GIC rather than referring to the recognition of the GIC itself, which is a permanent process up to a year). At that date, an initial measurement of that contract is calculated applying up to date assumptions as of that date as described in 4.1. The resulting initial FCF is added to the FCF of the GIC except any already incurred cash flows (pre-recognition cash flows). If the initial FCF is negative, the CSM of the GIC is increased by the absolute amount of the initial FCF according to IFRS 17.44 (a). If it is positive and the contract is added accordingly to the onerous GIC, the amount is added to the loss component of the GIC presented immediately as loss, or, in the rare case that the onerous GIC become profitable in the meantime and accordingly has a CSM, reduces the CSM of the GIC.Since the initial FCF was calculated at up to date assumptions, it is based as well on a current discount rate and current financial risk. To represent that properly, the historic discount rate at initial recognition of the GIC according to IFRS 17.B72 (b) and (c) is to be adjusted according to IFRS 17.B73. The as well locked-in financial risk is modified by simply adding the adjustment for financial risk in the newly added contract to the total adjustment for financial risk of the GIC and retained fixed for subsequent calculations based on the financial situation as of initial recognition of the GIC.7.1.2 Cash flows passing the contract boundaryThe contract boundary of an existing contract within a GIC excludes future contractual cash flows from consideration in measurement, including determining the CSM, if they are beyond the contract boundary. But the contract boundary is not fixed for all times. It is reviewed at each measurement date according to IFRS 17.B64 last sentence. And at each measurement date, all cash flows within the contract boundary are considered in measurement. The resulting change in FCF is part of the changes referred to in IFRS 17.B96 and adjust the CSM accordingly. According to IFRS 17.B72 (c), the adjustment to the CSM is to be determined on the basis of assumptions about time value of money (considering IFRS 17.B73) and financial risk as of initial recognition of the GIC. Accordingly, parts of a contract crossing in a period the contract boundary and are accordingly considered first time in measurement, might cause at that time initial insurance financial revenue or expense due to the difference between the current financial market situation as represented in the change in the FCF and the historic financial market situation as represented in the adjustment to the CSM.7.1.3 Derecognition of contractsThe derecognition of insurance contracts is rarely a specific business event. The CSM is eliminated in that period where at the end of the period no longer any future coverage is expected. The release pattern ensures that the release of CSM in that case equals the carrying amount of the CSM. In very special cases, it might turn out that the contractual rights and obligations are not actually fully performed and even coverage might need to be provided agains. In that case, the CSM is not restated but changes in the fulfilment cash flows may create again CSM or loss components.7.1.4 Contract ModificationsWhen a contract is modified, the standard distinguishes in IFRS 17.72 and 73 differentiate between modification meeting certain conditions, subsequently referred to substantial modifications, as described in IFRS 17.72 (a)-(c) and any other contract modification. See the Contract Modifications IAN for fuller details of when each apply. Where a substantial modification applies, the contract is derecognized and accordingly, in absence of any future coverage under the contract the CSM is entirely released in the current period.? Subsequently, a new contract is grouped to a GIC currently open for new business (not to a GIC which was open for new business as the original contract was initially recognized) following the normal guidance for grouping. The CSM of the GIC is adjusted on the basis of the initially recognized amounts of the FCF (see IAN contract modification) as in any other case of adding a contract to a GIC open for new business.Where another modification than a substantial applies, the modification of cash flows is considered in measurement of the FCF of the GIC and the change in FCF is considered as any other change in estimate in adjusting the CSM.7.2 How is interest accreted on the CSM?Interest accretion is described in IFRS 17.44 (b) to apply the historic interest rates as specified in IFRS 17.B72 (b). IFRS 17 does not specify how the interest accretion should incur. To achieve consistency with the release pattern of the CSM, it might be reasonable to apply the future expected releases of the CSM, assuming no other adjustment than accretion of interest and release, as basis for accretion of interest. The known timing of the release allows to understand it to be a cash flow and to apply the interest rate curve according the duration up to the release for accreting interest in the current period.Since interest accretion incurs, after closing a GIC for new business, as first adjustment to the CSM of a GIC, it is already determinable on the position of the CSM at the end of the prior period together with the projection of future releases to determine the release in the prior period.7.3 How is the CSM and the Loss Component released?The CSM of a GIC is “recognised as insurance revenue because of the transfer of 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”. (IFRS 17.44 (e))The release to revenue is accordingly the final step in subsequent measurement of the CSM of a GIC in a period. The reason for recognition of revenue is that services where transferred in the period but, as stated in IFRS 17.B119, not all services transferred equally result in the release of CSM. The release of CSM in the period considers both, the current and future coverage within the coverage period of the GIC.Basis for determining the amount to be released from the CSM in a period are the coverage units (see XX) of the GIC in the period and as expected in future periods during the remaining coverage period of the GIC.IFRS 17.B119 (a) refers to “expected coverage duration”, where the non-defined term “coverage duration” might be, in line with IFRS 17.44 (e), be interpreted as the “remaining coverage period”. “Expected” might be interpreted as referring to the expected value as applied as well for determining the estimates of future cash flows. Since there is no indication that the expectation as at initial recognition of the GIC are referred to, it could be assumed that the same current expectations regarding the remaining duration of contracts apply as considered in the estimates of future cash flows at the same reporting date. The equivalent may apply as well for the “each coverage unit … expected to be provided in the future” in IFRS 17.B119 (b). IFRS 17.76 (c) notes explicitly that the coverage units to be provided in future are reviewed if contracts are unexpectedly derecognized.IFRS 17.B119 (b) requires to determine the release of the current period by “allocating the contractual service margin at the end of the period (before recognising any amounts in profit or loss to reflect the services provided in the period) equally to each coverage unit provided in the current period and expected to be provided in the future.” Accordingly, the CSM of GIC is zero if there is no expectation that there will be in future coverage units provided under the contracts in the GIC. The release amount in the last period with a coverage unit without expectation of further coverage units will equal the carrying amount of the CSM.IFRS 17 is silent regarding considering time value of money in determining the released pattern. However, since interest is accreted on the CSM, a proper allocation of the accreted amounts over time might be best considered by as well discounting future coverage units in determining the relationship between the coverage units in the current period and future periods. That would result in releasing the CSM by means of an expected present value of future coverage units, including the current period.IFRS 17 is intentionally (IFRS 17.BC287) silent regarding the release pattern of a loss component. The loss component represents those future releases of cash flows and risk adjustments for non-financial risk which are not covered by premiums and are accordingly presented as negative expense rather than revenue since they were already, at recognition of the loss component, be recognized as expense and are now rewound. Accordingly, the loss component is released whenever a release of cash flows or risks adjustments for non-financial risk is presented as negative expense. IFRS 17.50 (a) requires a “systematic basis”. IFRS 17.52 adds: “The systematic allocation required by paragraph 50(a) shall result in the total amounts allocated to the loss component in accordance with paragraphs 48–50 being equal to zero by the end of the coverage period of a group of contracts.” Accordingly, any systematic approach might be seen as permissible, e.g. releasing the loss component as soon as possible by recognizing any released cash flow and risk adjustment from the LRC as negative expense until the loss component is exhausted, as a proportion of any cash flow or risk adjustment releasedevenly over the remaining coverage periodin proportion to coverage units as the CSM would have been released7.4 How is the CSM and its movements presented and which disclosures are required?The opening and closing CSM will need to be disclosed at each balance date, separately for insurance and reinsurance contracts. In addition, the movements of CSM should be disclosed at major product level, type of contract and “reportable segment” per IFRS 8. Further the insurer needs to disclose changes in fulfilment cash flows that have been used to adjust the contractual service margin during the year. To the extent that the CSM has been reduced because of changes in the Present value of cash flows due to changes in current estimates of mortality, morbidity or lapse assumption, this reduction needs to disclosed in the financial statement, even though it did not affect the carrying amount of the insurance contracts i.e the Policy Liability.7.5 In which granularity is the CSM and its movements to be provided to comply with presentation and disclosure requirements?The CSM disclosure should be revealed at a level of granularity which will ensure that useful information is not obscured but the reader is now overwhelmed by immaterial detail.Disaggregation may be appropriate by type of contract, major product linecountry or region reportable segment ( pe IFRS 8 Operating segment.) It essentially means the segments of the business which are reported internally for management purposes and to make decisions.An operating segment is a component of an entity:(a) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity),(b) whose operating results are regularly reviewed by the entity’s chiefoperating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and(c) for which discrete financial information is available.An operating segment may engage in business activities for which it has yet to earn revenues, for example, start-up operations may be operating segments before earning revenues.7.6 Is the CSM to be determined retrospectively or is a prospective determination possible?At each balance date, the CSM needs to be determined for all new business written during the year, this is determined prospectively at the inception of the policy. Thereafter CSM is determined by retrospective roll-forward, subject to prospective adjustments for changes to the present value, at inception discount rates, of future expected cash flows and risk adjustment relating to future services. Thereafter the CSM is determined by reference to the CSM for each group of contracts at the last balance date, rolling it forward with interest at inception discount rate and allowing for release of CSM as a result of services which were provided during the period and derecognition of CSM as a result of benefit reduction. This may be referred as the original basis.A separate, parallel process is to calculate the LRC using updated assumptions, such as discount rate, mortality, morbidity, etc, and also the risk adjustment. Changes in the carrying amount due to assumption changes related to future coverage and services other than discount rates will impact the CSM, not the magnitude of the carrying amount. An exception to this is when the CSM of the GIC becomes negative in this process, that is if the GIC become onerous. ................
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