Alternative CSM approach for IFRS 17

Kennisbank •

IFRS 17 Insurance Contracts is published by the International Accounting Standards Board (IASB) in May 2017. In November 2018, the IASB decided to postpone the effective date with 1 year, from 1 January 2021 to 1 January 2022. I

Alternative CSM approach for IFRS 17

Insurers had been lobbying for postponement as the initial time frame was considered very tight for proper implementation. Also questions have been raised on some aspects of the Standard, potentially leading to some changes in the near future. The most challenging subjects are related to methodologies
embedded in the Standard as well as operational implications and the transition to IFRS 17. Some of these challenges could be avoided if the Standard would allow an alternative, conceptually equivalent approach for the CSM.

Comparing frameworkd

The market-consistent valuation of insurance liabilities is an essential element, not only for IFRS 17, but also for example for Solvency II and Market Consistent Embedded Value (MCEV). The latter reporting metric was introduced by the CFO Forum in 2008 and has been used for many years to value insurance companies based on shareholder cash flows, broadly comprising of market consistent value of profits plus surplus capital. A very important difference between Solvency II and MCEV is that insurers commonly used an indirect distributable earnings approach for MCEV, while Solvency II valuations are in principle based on a direct balance sheet approach. The IFRS 17 Standard conceptually aligns with Solvency II methodologies. However, one important difference is that on the IFRS 17 balance sheet the expected future
earnings are reserved for by means of the Contractual Service Margin (CSM), while on the Solvency II balance sheet future earnings are materialized in Own Funds. The CSM, calibrated assuring nil profit at point of sale of a contract, is put on the balance sheet and is then run off over the lifetime of the contract. This CSM is the link between IFRS 17 and MCEV, as the CSM has conceptual similarities with the Value-inForce (ViF) as a component of MCEV.

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