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IFRS 17 CSM analysis of change and the impact on KPIs

Simon Perry Simon Perry

The IFRS 17 CSM analysis of change adds another factor to reporting standards. Simon Perry and Sarah Clare cover the key components of the analysis of change and the impact of potential CSM insurance business KPIs.

To fulfil the disclosure requirements of IFRS 17, an entity must set out reconciliations to show how the net carrying amounts of contracts changed over the reporting period, ie, provide an analysis of change (AoC).

Carrying amount is defined within paragraph IFRS17.40 as the sum of the liability for remaining coverage and the liability for incurred claims. Paragraph IFRS17.98 requires separate disclosures for insurance contracts issued and reinsurance contracts held.

Together these disclosures explain the net position. The key requirements for the analysis of change are detailed in paragraphs IFRS17.100 to IFRS17.116.

The calculation methodology of the Contractual Service Margin (CSM) at the end of the reporting period is set out in paragraphs IFRS17.44 and 45, for groups of contracts valued under the General Measurement Model (GMM) or the Variable Fee Approach (VFA) respectively. A full analysis of change of the CSM can be produced through iterating this calculation, layering on observed changes to each parameter in turn.

Contractual Service Margin

At the end of each reporting period, an element of the CSM is recognised as part of insurance revenue as a profit, in line with the service provided in that period. Conversely, losses arising on onerous contracts must be recognised immediately in full in the period when a loss component (LC) is established or increased.

The standard is precise on the method for initial calculation of the CSM and the adjustments to be made in each subsequent year. However, it's not explicit on the order in which these adjustments should be made, and the chosen method can impact the release of the CSM, as the release occurs after all adjustments are made.

Key components of the CSM Analysis of Change

1 New business

The CSM of any new contracts to be included in the group should be added to the CSM of existing contracts. Contracts added to the group must be subject to similar risks, be written within the same year, and have similar profitability.

2 Discount rate

The interest accredited on the CSM and the interest used to evaluate any CSM adjustments on contracts measured under the GMM must be calculated using 'locked-in' rates, ie, the discount rates applicable at initial recognition of the group of contracts in question.

Changes to fulfilment cashflows and evaluation of any CSM adjustments on contracts measured under the VFA must use current discount rates. Note that the fulfilment cashflows for the IFRS 17 balance sheet reporting purposes will still need to be calculated using current discount rates for contracts valued under the GMM as well as under VFA.

The outcome is the need to store and maintain locked-in discount rates for groups of contracts valued under the GMM throughout the whole group of contracts’ life as well as perform calculations for CSM adjustments under the GMM at locked-in discount rates and adjustments to the fulfilment cashflow for balance sheet purposes using current discount rates.

For contracts without direct participation features, a change in discount rates will lead to a change in fulfilment cashflows, but no change in the CSM. This is because the CSM is calculated using locked-in discount rates. The impact of a change in fulfilment cashflows should be recognised within the financial income and expenses part of IFRS 17 income statement.

The use and storage of many years of locked-in rates may present a significant challenge to insurers, who until now generally relied solely on the use of current discount rates. New systems may be needed to cope with these larger data storage requirements. 

3 Change in fulfilment cashflows (BEL plus risk adjustment)

Any change in the fulfilment cashflows related to the future service under a group of contracts will result in an adjustment to the CSM and it’s run-off pattern. This may be a result of:

  • experience variances resulting in a change to the estimates of future cashflows
  • differences between actual and expected investment components
  • any change in the risk adjustment related to future service

Where there are discretionary cashflows (eg, with-profits policies), any subsequent discretionary changes will impact the future service and expected cashflows and will therefore result in an adjustment to the CSM.

If there is an adverse change in assumptions used to estimate future cash flows, this will result in a reduction to the CSM. The CSM is floored at zero, so any excess loss must be immediately recognised in the IFRS 17 income statement and will create a LC.

Note that only changes relating to future service should result in an adjustment to the fulfilment cashflows. The impact of experience variances related to the current period must be immediately recognised in the IFRS 17 income statement.

4 Release of the CSM

The release of the CSM forms part of the profit recognised over each period and is, therefore, recognised in the IFRS 17 income statement. The amount of the CSM release in each period is calculated in line with the change in coverage units, whereby the CSM after all adjustments is allocated proportionally between the current and future expected coverage units.

Note that the amount of CSM release must be calculated after adjustments applicable in the reporting period.

Insurers must decide on the methodology for coverage units for each product at outset. This would include the cash flows that form services provisions, as well as a consideration of whether to use discounted or undiscounted coverage units for the calculation. This choice will impact the CSM release pattern.

Once the methodology is decided on, it won't be changed throughout the lifetime of the contracts, unless certain events occur, such as changes to contracts themselves or otherwise justified accounting policy changes.

As noted above, for onerous contracts, the loss must be recognised immediately in the IFRS 17 income statement and can't be spread over the lifetime of a group of contracts in a similar way to the CSM.

However, the loss component needs to be tracked and gradually exhausted or reversed over time, with the expected changes in fulfilment cashflows allocated between the LC and the revenue part of the IFRS 17 income statement. Variances related to the current and future periods adjust the LC in full.

The mechanism of amortisation of the LC is similar to the CSM in principle, though with a set of LC related specifics. An LC analysis of change will be covered in a separate article in the future.

Return on equity

The CSM is the key concept of IFRS 17 and, as such, will be the key impact-making component for insurers’ KPIs. One of the key KPIs that must be considered is the return on equity (RoE).

Return on equity is defined as net profits earned over shareholder equity. If we consider one group of contracts over time, we would expect:

  • net profits earned from CSM and risk adjustment releases to fall gradually as the CSM runs off
  • shareholder equity to increase with releases of the CSM and risk adjustment (assuming profits are not distributed and instead retained within the company as equity)
  • RoE to fall as a result for this group of contracts

This highlights the need for companies to continually write increasing levels of new business to maintain the RoE, or to seek out alternative, riskier asset strategies to increase investment returns.

Insurers may look at methods of controlling the RoE. For example, by slowing the run-off of the CSM by adopting a coverage-units methodology that ensures slower or more-even release of CSM over time.

Alternatively, insurers may look to control the RoE by altering planned distributions of equity (ie, dividends). Distributing more equity will act to increase the RoE in the short term. However, this strategy may not be sustainable over the long term.


As the key component of IFRS 17 valuation, the CSM is likely to become a KPI under the new reporting standard, as well as the rate of change of the CSM. The change in CSM over a reporting period will impact a range of measures each year, including profit, operating ratios and, as discussed above, RoE.

The need for contract groupings under the standard will provide more-granular data, with which the insurer can analyse the emergence of profit by group. The speed of release of the CSM is likely to impact the attractiveness of certain products against others and may impact future product design.

Companies may also be interested in analysing and understanding the sensitivity of the CSM, and profits released to changes in assumptions or methodology. Experience variances may be a greater risk for small books of business, due to lower pooling of risks, and therefore, greater risk of fluctuations in experience.

To minimise the impact of volatility on operating profit, an entity may look at an adjusted measure of profit, allowing for both the CSM and equity. Equity is an equivalent to the current profits of a business, while the CSM represents future profits. This would remove the impact on CSM volatility on this measure.


The CSM and its AoC will form an important part of insurers’ KPIs post IFRS 17 transition. As such, it will be important to perform the AoC at the level of granularity that will enable a company to evaluate and disclose the desired set of KPIs.

The methodology of the CSM adjustment and release employed will greatly influence the AoC presented in disclosures and will impact the KPIs. Therefore, it's important to continue considering these areas deeply and continuously challenge yourselves in respect of the outcomes that will be presented to users of financial statements.

For support with implementing CSM Analysis of Change for IFRS 17, get in touch with Simon Perry.

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