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    spyros georgatos

      Hello to everyone, I have the following question regarding the CSM under VFA.

      Suppose you have a UL policy with the difference between inflows and outflows be negative (let’s say -100), i.e the policy is loss-making.

      Moreover suppose that the Risk Adjustment, although it exists, is immaterial and held to 0, for simplicity.
      Therefore the fulfilment cash flow (FCF) is -100+0=-100.
      The CSM at initial recognition is max(-FCF,0)=100. Therefore, I recognize a positive unearned profit at inception although the policy is loss making.

      What am I missing here? Is my thinking right?

      Thank you all for your time


        Hi Spyros,

        if you are having loss making policy of 100 (pv inflow < pv outflow), you will not have CSM but need to recognize the loss through PnL at initial recognition; but you might defer that loss if you have gain from ceded cashflow.

        Hope this help, thank you

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