Section 01
The Routing Decision Tree
Every FCF change must be classified — this is the most critical decision in IFRS 17 subsequent measurement. The classification determines whether the change is absorbed by the CSM (smoothing P&L) or flows directly to the income statement.
The Core Rule — IFRS 17 Para 44(c)
Future Service → Adjusts CSM | Past/Current Service → Direct to P&L
Financial assumption changes (discount rate) → P&L or OCI via Para 87 — NEVER through the CSM
→ Adjusts CSM · Para 44(c)
Future Service
- Non-financial assumption changes for future periods (mortality, lapse, expenses Years 2–20)
- Premium experience variances relating to future coverage periods — Para B96(a)
- Acquisition cost variances tied to future service renewals
- Knock-on effects of current-period experience on future FCF — IFoA 2020
→ Direct to P&L · Para 44(c)
Past / Current Service
- Actual vs. expected claims for the current period (death benefits paid)
- Actual vs. expected premiums for the current coverage period
- Maintenance cost variances incurred in the current reporting 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)
Section 02
Four Types of FCF Changes That Adjust the CSM
Type A
Non-Economic Assumption Changes
Revised mortality, lapse, or expense assumptions for future periods trigger a CSM adjustment. Discount rate changes are excluded (Para 87 → P&L/OCI).
Actuary revises Year 5–20 mortality improvement → projected future claims fall by $10,000 PV → CSM increases by $10,000.
Type B
Premium Experience Variances (Future Service)
Per Para B96(a), only the portion of premium variances attributable to future coverage periods adjusts the CSM. The current-period premium variance goes directly to P&L.
Premium shortfall for Years 2–20 → CSM reduced; Year 1 shortfall → P&L directly.
Type C
Acquisition Cost Variances (Future Service)
Differences between actual and expected acquisition costs tied to future service adjust the CSM. Costs relating to past or current service are expensed to P&L immediately.
Excess agent commission for future renewals → CSM down; commission for Year 1 → P&L.
Type D
Knock-On Effects of Current Experience
Current-period variances alter the in-force count, changing projected future FCF for all remaining years. Per IFoA Working Party (Jan 2020), this knock-on impact on future service adjusts the CSM.
Year 1: 12 deaths vs. expected 10 → in-force 988 vs. 990 → future FCF for Yrs 2–20 revised → CSM adjusted.
IFRS 17 Para 44(c), B96–B100 · IFoA CSM Working Party (Jan 2020)
Section 03
Numerical Example: Mortality Improvement
A favourable FCF change (+$10,000 from mortality improvement) is absorbed into the CSM — it is NOT recognised immediately in P&L. The CSM defers this additional profit, releasing it over future service periods. This is the core P&L smoothing mechanism of IFRS 17.
Episode 2 — Base Case (No FCF Change)
Opening CSM (Year 1)$120,000
(+) Accretion @ 5%+$6,000
(+) FCF change—
(−) Release (5.831% × $126,000)−$7,347
Closing CSM Year 1$118,653
Episode 3 — With FCF Change (+$10,000)
Opening CSM (Year 1)$120,000
(+) Accretion @ 5%+$6,000
(+) FCF change (mortality improvement)+$10,000
(−) Release (5.831% × $136,000)−$7,927
Closing CSM Year 1$128,073
Key Insight — P&L Smoothing Function of the CSM: The favourable FCF change (+$10,000) is absorbed into the CSM — not recognised immediately in P&L. Higher closing CSM vs. base case: +$9,420. The CSM acts as a buffer, preventing volatile assumption changes from flowing directly to the income statement.
IFRS 17 Para 44(c) · Non-economic assumption change relating to future service → adjusts CSM upward
Section 04
Adverse FCF Changes: When the CSM Absorbs Losses
✅ Scenario A — Adverse Within CSM
Lapse assumption revised upward · FCF increase $15,000 PV
| Opening CSM | $120,000 |
| (+) Accretion (5%) | +$6,000 |
| (−) FCF Change (adverse lapse) | −$15,000 |
| (−) Release (5.831% × $111,000) | −$6,472 |
| Closing CSM | $104,528 |
✅ CSM absorbs adverse change — No P&L impact from assumption change itself. CSM reduced but remains positive.
⚠️ Scenario B — Adverse Exceeds CSM
Catastrophic claims revision · Adverse FCF increase $130,000 PV
| Opening CSM | $120,000 |
| (+) Accretion (5%) | +$6,000 |
| CSM pre-change (after accretion) | $126,000 |
| (−) Adverse FCF Change | −$130,000 |
| CSM floored at zero | $0 |
| Loss Component → P&L | $4,000 |
⚠️ Loss Component: $4,000 → P&L immediately · CSM exhausted · LC tracked separately within LRC
Section 05
The Loss Component: Tracking & Reversal
Rule 1 — Trigger: Loss Component Created
When an adverse FCF change exceeds the remaining CSM balance, the CSM is reduced to zero and the excess is recognised immediately in P&L as insurance service expense. No deferral permitted.
IFRS 17 Para 47
Rule 2 — Tracking: LC Within the LRC
The Loss Component is tracked separately within the LRC and systematically released to P&L as the onerous coverage period unwinds — allocated proportional to remaining coverage units (Para 50(b)).
IFRS 17 Para 47–52 · PSAK 117 disclosure
Rule 3 — Reversal: LC Reduced First
If subsequent FCF changes are favourable, the LC must be reduced to zero before any CSM is re-established. Favourable changes cannot bypass the LC to create a new CSM.
IFoA (2020) · Sequence: Reduce LC → rebuild CSM
Rule 4 — Onerousness Testing Every Period
Onerousness must be tested at every reporting date. A profitable group can become onerous; an onerous group can recover. Groups are locked — no offsetting across cohorts or annual groups is permitted.
IFRS 17 Para 47 · PSAK 117: Annual cohort lock
Episode 3 — Key Takeaways
The Routing Rule — Every FCF change is classified: future service → adjusts CSM; past/current service → P&L directly. Financial assumption changes (discount rate) route to P&L or OCI via Para 87 — never through the CSM.
Four FCF Change Types → CSM — Non-economic assumption changes, premium experience variances, acquisition cost variances, and knock-on effects of current experience on future FCF — all adjust the CSM when relating to future service.
CSM as P&L Smoother — Base closing CSM Year 1: $118,653. Favourable FCF change +$10,000 → closing $128,073. Adverse FCF change −$15,000 → closing $104,528. The CSM absorbs both swings, preventing volatile P&L impacts from assumption revisions.
Loss Component Floor — CSM is floored at zero. Adverse FCF changes exceeding the CSM balance create a Loss Component recognised immediately in P&L. Onerousness tested every reporting date. LC is reversed before any CSM is re-established.