The IFRS 17 accounting standard is set to have a significant impact on the way life insurers handle their financial reporting. One area in particular that is causing concern for insurers is the Contractual Service Margin (CSM).
So, what exactly is the CSM? Simply put, it is the unearned profit that insurers expect to make over the lifetime of a policy. The CSM is calculated by subtracting the present value of future premiums and claims from the present value of the expected future cash flows of the policy.
Under IFRS 17, life insurers will need to recognize the CSM as a liability on their balance sheets. This means that insurers will need to calculate the CSM for each policy and re-calculate it each reporting period. This will require insurers to maintain detailed records on each policy, making the accounting process more complex and time-consuming.
One area that is causing particular concern for insurers is the calculation of the CSM for long-duration insurance contracts. These contracts have a term of more than one year and typically include products such as life insurance, annuities, and disability income insurance.
Calculating the CSM for long-duration contracts is complex because insurers need to take into account the expected cash flows over the lifetime of the policy, which can span several decades. In addition, insurers must also consider a number of other factors, such as mortality rates, interest rates, and policyholder behavior.
One of the key challenges that insurers face when calculating the CSM is determining the discount rate to use. The discount rate is the rate at which insurers discount the expected cash flows of the policy back to their present value. This rate is based on the insurer`s own cost of capital and is therefore highly dependent on the company`s individual circumstances.
Insurers also need to consider a number of other factors when calculating the CSM, such as the expected timing and value of policyholder benefits, changes in policyholder behavior, and the impact of future economic conditions.
Overall, the shift to IFRS 17 is a significant challenge for life insurers, particularly when it comes to calculating the Contractual Service Margin. However, by investing in the necessary systems and processes, insurers can ensure that they are able to meet the new accounting standards and continue to thrive in the ever-changing insurance industry.
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