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.
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.