The unearned profit that an insurance firm expects to earn from the services it provides. Many insurance firms usually recognize profit from an insurance contract at the point of sale. However, under new standards on insurance, such day 1 profits have to be offset with a liability – which is simply the contractual service margin (CSM).
The CSM is gradually released over the term of the contract as services are provided. The insurer realizes profits (associated with a contract) over multiple future reporting periods as it provides the contractual services. In other words, the insurer is required to defer the unearned profits on the issuance of policies, only recognizing a corresponding part of the profits that relate to each and every respective period over the contract term.
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