Onerous contracts

jaip04jaip04
in CIA.IFRS17

Hi, an onerous contract is defined as a net OUTFLOW for sum of : FCF + Acquisition cash flows + cash flows arising from contract . FCF in one of these IFRS papers is also defined as being NEGATIVE if there's a profit (which the CSM offsets). How does that tie into onerous contracts? Is a profit for acquisition cash flows + cash flows arising from contract also negative ?

Comments

  • grahamgraham
    edited March 2021

    I'm not quite sure if I understand your question so let's break it down:

    • If FCF < 0 then the contract is likely profitable so there is a net inflow of cash to the insurer (this would be a non-onerous contract)
    • In this case, the insurer establishes as CSM (Contractual Service Margin) and this CSM amount is gradually released into profit as services and coverage are provided
    • But an onerous contract is one that is not likely to be profitable, so there is a net outflow of cash
    • Here, you do not need to establish a CSM for an onerous/unprofitable contract since we would have FCF > 0. (Actually you have to be slightly more careful because I suppose an onerous contract cold still have FCF < 0 and require a CSM even if the the total outflow is positive, although that doesn't seem likely)

    So the "tie-in", very roughly speaking, is that onerous contracts probably never need to have a CSM established (because it's unlikely that FCF < 0 for onerous contracts)

  • jaip04jaip04

    Thanks that makes sense

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