1. Contractual Service Margins WS
Insurance IFRS Seminar
December 2, 2016
Darryl Wagner
Session 24

2. Situation
A term insurance contract has the following riskless (no Risk Adjustment!) expected cash flows. Interest is 0% (no discounting!).
Year 1 2 3 … 9 10
Premiums
10,000
Claims
1,000
2,000
8,000
9,000
Expenses
12,000

3. Problem 1 1.1 What is the contractual service margin at issue?
1.2 What alternative methods might you use to amortize the contractual service margin?
Case 1: What is the run-off of the contractual service margin if it is based on expected claims? What are the expected year by year profits?
Case 2: What is the run-off of the contractual service margin if it is based on the premiums received? What are the year by year profits?
Which one of these is consistent with the latest guidance?

4. Problem 2
2.1 Suppose actual claims in year 2 are 5,000 and that this is a random fluctuation not expected to recur. What is the contractual service margin amortization in year 2 and later and what is the reported profit?
2.2 Same as above, in addition, suppose that future claims in years 3 and later are expected to be 1,000 higher each year than originally anticipated. Do these using premiums to amortise the CSM.

5. Thank You