HKFRS 17 Insurance Contracts: Contractual service margin


Introducing the Institute’s new guidance on determining coverage units and relative weighting for insurance contracts that provide multiple services

Determining of the amount of contractual service margin (CSM) in Hong Kong Financial Reporting Standard (HKFRS) 17 Insurance Contracts to recognize in profit or loss is a topic involving technical complexity and judgement. This is notably pronounced in relation to contracts involving blends of multiple and heterogeneous services. Reminder: Entities should also keep in mind relevant requirements such as Hong Kong Accounting Standard 1 Presentation of Financial Statements paragraph 122, which requires disclosures on judgements management has made in the process of applying its accounting policies.


In May, the Institute published new educational guidance on applying the recognition requirements for the CSM in HKFRS 17 in its place, including determining coverage units and relative weighting for contracts that provide multiple services.

The guidance is designed to provide preparers with a summary of relevant requirements and principles in HKFRS 17. In doing so, it considers two examples intended to be representative of products in the Hong Kong market that help to illustrate common challenges encountered when applying the requirements in question.

The examples in the guidance are simplified fact patterns designed for educational purposes and general reference. The guidance does not prescribe a specific approach to applying the requirements, and those presented are not the only possible approaches. 

Visit the HKFRS 17 Insurance Contracts webpage for other useful resources. And importantly, remember: When in doubt, consult!

Structure and scope of the guidance

The guidance considers focuses on contracts that provide multiple services, particularly the identification of coverage units and the determination of the relative weighting of the benefits provided.

For the purposes of illustration, the guidance assumes that its examples are insurance contracts without direct participation features and measured under HKFRS 17’s general measurement model. Nevertheless, the CSM recognition principles for insurance contracts with direct participation features are similar, and much of the guidance would be relevant when assessing contracts with direct participation features.

The guidance begins with an explanation of the relevant requirements in HKFRS 17 and discussions on them. It then introduces the fact patterns for two illustrative examples, and provides a number of various potential solutions for each example. In doing so, it illustrates the potential application of those requirements to specific and simplified scenarios.

Illustrative examples

The below is a brief, high-level overview of the two examples used to illustrate application of the CSM requirements and the types of potential approaches an entity may take. For more information, read the guidance in full.

Example 1 – multiple insurance services
A medical reimbursement product with multiple insurance services requires policyholders to choose a benefit tier (ward, semi-private or private). The benefits and limits in the schedule are constant each year. An example benefits schedule is provided in the guidance.

The guidance illustrates the following possible CSM determination approaches:

  • Approach 1A: Voluntary disaggregation into groups of contracts which consist of homogeneous contracts.
  • Approach 1B: Keep insurance contracts in one group, differentiate between different tiers of policyholders.
  • Approach 2: Calculate probable maximums of each benefit based on historical claims data.
  • Approach 3: Premiums as a proxy for the services provided in the contract.
  • Approach 4: Expected cash flows as a proxy for the services provided in the contract.

Example 2 – blend of investment services and multiple insurance services
An investment-linked product with a blend of investment services and multiple insurance services. The base contract is a regular premium investment-linked product with flexible investment options, as well as protection from death and total permanent disability (TPD) with a fixed sum assured. The fixed sum assured depends on the amount of protection desired by the policyholder, and is paid in addition to the account balance of the contract on death or TPD. A medical reimbursement rider and critical illness rider are attached as optional benefits. The base contract and the riders have the same expected coverage period.

The guidance illustrates the following possible CSM determination approaches:

  • Approach 1: Calculate quantity of benefits for the contract using maximum payment of the different contractual features.
  • Approach 2: Calculate a constant quantity of benefit for each contract and scale by a factor to reflect different sizes of contracts in the group.
  • Approach 3: Separately calculate quantity of benefits for the investment-return service and insurance coverage, using account balance for investment-return service.
  • Approach 4: Similar to approach 3 with a weighting of all the insurance contract services in the contract.
  • Approach 5: Separately calculate quantity of benefits for the investment-return service and insurance coverage, using a constant measure for investment-return service.

Read the full guidance now for advice on how to determine the CSM for different contracts. 

This article is contributed by the Institute’s Standard Setting Department. Visit the department’s recently launched “What’s new” webpage for the latest publications, webcasts, and comment letters and follow it on LinkedIn for upcoming activities.