The contractual service margin at inception

Learning objectives

• Explain that the contractual service margin is set so that no income or expenses arise from the initial recognition of the fulfilment cash flows.L1
• Calculate the initial contractual service margin of a profitable group from given cash flows and a given risk adjustment.L3

Normative references

• IFRS 17 §38The contractual service margin represents the unearned profit of the group; at initial recognition, it is set so that no income or expenses arise from the fulfilment cash flows, from any cash flows arising at that date, and from the derecognition of any asset for insurance acquisition cash flows or of other prior assets or liabilities, unless the contract is onerous (para. 47).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• On initial recognition of a group of contracts, the contractual service margin is measured at an amount that results in no income or expenses arising from the initial recognition of the fulfilment cash flows, of the cash flows arising at that date and of the derecognition of the asset for acquisition cash flows.L1
• Nadir SA recognises a group of contracts: it receives {premium_received} of premiums at issue and expects to pay {claims_amount} of claims in one year. Case data, from management's judgement: the discount rate is {discount_rate} (a rate not imposed by the standard) and the risk adjustment for non-financial risk is {risk_adjustment}. Acquisition cash flows and cash flows already occurred are nil. Calculate the net amount of the fulfilment cash flows and the premiums received at issue (a negative amount means a net inflow) and the initial contractual service margin.L3
• Orion SA recognises a profitable group of contracts. It received {premium_received} of premiums at issue. The present value of expected claims is {pv_claims} and the risk adjustment for non-financial risk is {risk_adjustment} (case data; acquisition cash flows nil). The contractual service margin is therefore 800 euros: it gives rise to no income at issue. Record the entry for the initial recognition of the group (liability equal to the fulfilment cash flows and the margin).L3