GROUP ACCOUNTING POLICIES (continued) 5. Insurance, investment and reinsurance contracts (continued) 5.1 Classification of contracts (continued) 5.1.3 Measurement (continued) Risk adjustment for non-financial risk The risk adjustment for non-financial risk is applied to the present value of the estimated future cash flows, and it reflects the compensation that the Group requires for bearing the uncertainty about the amount and timing of the cash flows from non-financial risk as the Group fulfils insurance contracts. For reinsurance contracts held, the risk adjustment for non-financial risk represents the amount of risk being transferred by the Group to the reinsurer. Methods and assumptions used to determine the risk adjustment for non-financial risk are discussed in Note 36. Contractual service margin The CSM is a component of the carrying amount of the asset or liability for a group of insurance contracts issued representing the unearned profit that the Group will recognise as it provides insurance contract services in the future. At initial recognition, the CSM is an amount that results in no income or expenses arising from: a) the initial recognition of the FCF; b) cash flows arising from the contracts in the group at that date; c) the derecognition of any insurance acquisition cash flows asset; and d) the derecognition of any other pre-recognition cash flow; e) Insurance revenue and insurance service expenses are recognised immediately for any such assets derecognised. The number of coverage units in a group is the quantity of insurance contract services provided by the contracts in the group, determined by considering the quantity of the benefits provided and the expected coverage period. The total coverage units of each group of insurance contracts are reassessed at the end of each reporting period to adjust for the reduction of remaining coverage for claims paid, expectations of lapses and cancellation of contracts in the period. They are then allocated based on probability-weighted average duration of each coverage unit provided in the current period and expected to be provided in the future. For groups of reinsurance contracts held, any net gain or loss at initial recognition is recognised as the CSM unless the net cost of purchasing reinsurance relates to past events, in which case the Group recognises the net cost immediately in profit or loss. For reinsurance contracts held, the CSM represents a deferred gain or loss that the Group will recognise as a reinsurance expense as it receives insurance contract services from the reinsurer in the future and is calculated as the sum of: a) the initial recognition of the FCF; and b) cash flows arising from the contracts in the group at that date; c) the amount derecognised at the date of initial recognition of any asset or liability previously recognised for cash; d) cash flows related to the group of reinsurance contracts held (other pre-recognition cash flows); and e) any income recognised in profit or loss when the entity recognises a loss on initial recognition of an onerous group of underlying insurance contracts or on addition of onerous underlying insurance contracts to that group. No CSM is required for PPS’ participating contracts as all net cash flows of the Group are returned to qualifying policyholders via the PPS Profit-share account, a policy feature. 119 Group Accounting Policies
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