Recap from Episode 1
Where We Left Off
LRC at Inception — 20-Year Whole Life Policy
1,000 Policyholders · $200K Death Benefit · Locked-in Rate: 5% p.a.
| Component | Amount |
|---|---|
| PVFCF | −$150,000 |
| Risk Adjustment (RA) | +$30,000 |
| CSM (locked in at inception) | +$120,000 |
| LRC Net | $0 |
Episode 2 Question: The $120,000 CSM is locked in at inception — but how does it actually reach the P&L over 20 years? Answer: Coverage Units — the mechanism that systematically releases deferred profit as insurance services are delivered.
Section 01
The CSM Roll-Forward: 5 Moving Parts
Roll-Forward Formula — IFRS 17 Para 44
Opening CSM + New contracts + Interest accretion ± FCF changes − CSM release = Closing CSM
A
Opening CSM Balance
Starting point each reporting period. Carries forward the unearned profit locked in at inception discount rate.
B
New Contracts Added
CSM from newly issued contracts in the same group is added to the existing balance during the period.
C
Interest Accretion
CSM grows at the locked-in discount rate from inception. Financial changes do not adjust CSM under GMM.
IFRS 17 Para 44(B)
D
FCF Changes — Future Service
Changes in future service FCF (assumption changes & experience variances) adjust the CSM. Deep-dive in Episode 3.
IFRS 17 Para 44(C)
E
CSM Release via Coverage Units — Always Last
The CSM is released to P&L based on the Amortization Ratio (CU delivered ÷ total remaining CU) applied to the CSM balance after accretion. This is always the final step — the standard mandates release occurs after all other adjustments.
IFRS 17 Para 44(E) — mandated as final step
Section 02
Interest Accretion on the CSM
The CSM accretes interest at the locked-in rate from inception (5% p.a. in our example). This accretion is added to the CSM balance — it is NOT recognised in P&L. It unwinds the time value of deferred profit only.
Interest Accretion — Years 1–3 (Before CSM Release)
Locked-in Rate = 5% p.a. · Opening CSM = $120,000
| Year | Opening CSM | Accretion (5%) | Closing CSM |
|---|---|---|---|
| Year 1 | $120,000 | +$6,000 | $126,000 |
| Year 2 | $118,653* | +$5,933 | $124,586 |
| Year 3 | $116,987* | +$5,849 | $122,836 |
*After CSM release in prior year. Rate is fixed at initial recognition — never updated for market movements. (IFRS 17 Para 44 & B72(b))
Section 03
What Are Coverage Units?
"The number of coverage units is the quantity of coverage provided, determined by considering the quantity of benefits and expected coverage duration for each contract." — IFRS 17 Para B119
Two key inputs: Quantity of Benefits (sum at risk, face amount, or survival benefit) and Expected Coverage Duration (remaining coverage period). Only active policies contribute — lapses and deaths reduce the count each period.
Coverage Unit Calculation — 20-Year Whole Life
1,000 policyholders · 15 exits/year (10 deaths + 5 lapses) · Σ Total CU = 17,150
| Year | In-Force | CU Delivered | Σ CU Remaining |
|---|---|---|---|
| Year 1 | 1,000 | 1,000 | 17,150 |
| Year 2 | 985 | 985 | 16,150 |
| Year 3 | 970 | 970 | 15,165 |
| … | … | … | … |
| Year 20 | 715 | 715 | 715 |
| Total | — | 17,150 | — |
Section 04
CSM Amortization Ratio & Release
Amortization Ratio Formula — IFRS 17 Para 44 · B119
Ratio_t = CU_t ÷ Σ CU remaining from t
Release_t = Ratio_t × (Opening CSM_t + Accretion_t)
Full CSM Roll-Forward — Years 1–3
Locked-in Rate 5% · 15 exits/year · Σ Total CU = 17,150 · No new contracts · No FCF changes
| Year | Opening CSM | Accretion | CU Delivered | Σ CU Rem. | Ratio | Release | Closing CSM |
|---|---|---|---|---|---|---|---|
| Year 1 | $120,000 | +$6,000 | 1,000 | 17,150 | 5.831% | −$7,347 | $118,653 |
| Year 2 | $118,653 | +$5,933 | 985 | 16,150 | 6.099% | −$7,599 | $116,987 |
| Year 3 | $116,987 | +$5,849 | 970 | 15,165 | 6.396% | −$7,857 | $114,979 |
| Year 20 | — | — | 715 | 715 | 100.000% | — | ≈ $0 |
Validation: Year 20 ratio = 100% — all remaining CSM released in final year. Closing CSM ≈ $0 ✅. Release accelerates over time — denominator shrinks faster than numerator as policies exit.
Section 05
What Adjusts the CSM? Future vs. Past Service
Every FCF change must be classified — this routing decision drives all subsequent accounting and P&L volatility.
→ Adjusts CSM · Para 44(c)
Future Service
- Non-financial assumption changes for future periods (mortality, lapse, expenses)
- Premium experience variances relating to future service
- Acquisition cost variances tied to future service
- Favourable changes increase CSM; adverse changes decrease CSM (floored at zero)
→ Direct to P&L · Para 44(c)
Past / Current Service
- Actual vs. expected claims for the current period
- Actual vs. expected premiums for the current period
- Actual vs. expected expenses for the current period
- Financial assumption changes (discount rate) → P&L or OCI via Para 87
IFRS 17 Para 44(c), B96–B100 · Para 87 (financial changes) · IFoA CSM Working Party (2019)
Episode 2 — Key Takeaways
CSM Release via Amortization Ratio — Ratio = CU_t ÷ Σ CU remaining from period t. Denominator shrinks each year — ratio accelerates from 5.831% (Yr 1) to 100% (Yr 20).
5-Part CSM Roll-Forward — New business + interest accretion + FCF changes (future service) + experience variances − CSM release. Release is always the last step (Para 44(e)).
CSM as a Leading Profitability Indicator — The CSM balance signals future profit recognition — a critical disclosure metric under PSAK 117 for Indonesian insurers reporting to OJK and IAI.
Routing Rule is Critical — Future service FCF changes adjust the CSM; past/current service variances go straight to P&L. Financial assumption changes route to P&L or OCI via Para 87 — never through the CSM.