Contractual service margin (CSM)
IFRS 17 component representing the unearned future profit of a group of contracts, released to profit as service is provided.
The contractual service margin is the central component of the liability under IFRS 17 that represents the not-yet-earned future profit of a group of insurance contracts. At underwriting, when the group is profitable, the expected profit is not recognized immediately but stored in this margin, then released to profit over time as insurance service is provided. This mechanism spreads profit recognition over the cover period and prevents recognizing a gain at issuance. The margin is remeasured at each closing for changes in assumptions relating to future services, making it a buffer of variations: certain unfavorable developments reduce the margin rather than directly affecting profit, as long as it stays positive. If it becomes negative, the group is loss-making and the loss is recognized immediately. For the analyst, the level and evolution of the contractual service margin indicate the portfolio's latent profitability.
Textbook case: an upward revision of expected future claims on a group of contracts first reduces its contractual service margin, with no immediate impact on profit as long as it stays positive.
CSM, contractual service margin
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