In this workout, we're told that an insurance company writes a portfolio of participating policies which mature at the end of year six.

The expected investment return is 8%, and the insurance company's fee is 10% of the annual investment returns.

We're asked to calculate insurance service revenue, and we'll assume that cash flows occur at the end of each year, but the risk margin is nil, and the actual investment return is 10% in year four.

Now, the premium received upfront for this policy is 1,000, and the first step is to calculate the expected value of this at maturity, and that's the premium received of 1,000, compounded at the 8% rate of return, and that's for the six years of the policy duration.

And that gives an expected fund value at maturity of 1,586.9. Now we can immediately calculate the insurance company's profits.

That's the contractual service margin because that's going to be the expected fund value less the premium received, that's the investment returns over the life of the policy, and then multiply that by 10%.

So that means that the contractual service margin is 58.7.

The next step is to calculate the investment returns over the policy life.

And we start with the 1,000 of premium received.

And that's going to be invested so that they can generate an investment return each year.

Now, the investment returns that are generated, they're effectively shared between the insurer and the policyholder.

So we'll allocate those returns.

And the insurer share, that's the beginning value of the fund, multiplied by the 8% return, multiplied by the 10%.

And that gives a return for the insurer of eight.

Now, the policyholder's share, that's the beginning balance, multiplied by the investment return, multiplied by one minus that rate.

So the policyholder share is 72, and then we sum that together to give the ending value on the fund of 1,080, and that's at the end of year one.

We can now roll this forward to the end of the policy.

And that's our fund balance calculation.

The next step is to have a look at the CSM.

Now, the CSM balance, we've calculated the starting balance on that of 58.7, so we'll pop that in, and that then becomes the beginning balance in the next year.

Now, the CSM can change each year as a function of two things.

First of all, it can change because of the effect of the change in the underlying. So if the investments outperform or underperform, that means it's going to change the profit that's baked into the contract. And using the variable fee approach, that is going to change the actual CSM that's expected.

Also, as we've done previously, the CSM then needs to be released to the income statement each year.

Let's start with the effect of the change in the underlying.

Now, this is going to be calculated based on the investment return each year relative to the amount that was originally expected. So I identify the rate that was actually generated of 8%.

I then subtract the expected amount, and I'm going to lock my reference to this, and then multiply this by the beginning balance on the fund, and then multiply this by the insurer's fee percentage, and again, lock that in the calculation.

Now, this gives a zero calculation for year one, and that's because the investment return of 8% exactly matches what was expected. However, if there is a change because returns exceed or underperform expectations, that's going to play out as an adjustment to the CSM.

The next thing to do is to calculate the CSM that's released each year, and this is going to be amortized over the policy life.

However, this is going to be calculated based on the beginning balance, plus the effects of any changes due to a change in the underlying.

So I start by calculating the CSM balance.

That's the beginning amount, plus the effect of any change.

I'm then going to amortize that over the remaining policy duration. So I'll build a little calculation for this.

I need the number of policy years.

I'll lock my reference to that.

Add one, and then subtract the actual year count.

So in year one, I'm effectively amortizing it over six years, and then multiply by minus one.

So I'm releasing it. And that gives me a deduction of 9.8 in the first year, and I add that together with the beginning balance and the change to give the ending balance on the CSM of 48.9. I can then roll that calculation forward to the end of the policy.

And what we can see is we have an adjustment to the CSM in year four. That's the year when the investment returns are 10%, they exceed the 8% expected. That uplifts the CSM, and that uplift is then amortized over the remaining time of the policy.

So that's our CSM calculation. The next step is to calculate the fulfillment cash flows.

Now, the fulfillment cash flows are effectively the policyholder's account value, and that's going to start off as the premium that they pay less the profit that's baked into that premium.

So that gives them a beginning fulfillment cash flows balance of 941.3. We make that the beginning balance in the first year.

We're then going to add the policyholder's share of returns on the fund.

And we then need to allow for any payout.

Now, I'm going to create a little conditional formula here to automate the calculation. I'm going to say if my year count is equal to the policy duration, then we're going to have a payout which is equal to the balance.

Otherwise, it's zero.

And as we'd expect, we get zero because this is not the final year of the policy. And then we add all of that together to give the ending balance, and that gives the fulfillment cash flows at the end of year one of 1,013.3. Now let's roll that forward to the end of the policy.

And we can see that our conditional formula has worked nicely because in the final year, we get a payout of the full account value for the policyholder, leaving it a zero balance on the fulfillment cash flows.

The next step is to look at the insurance contract liability.

Now, this liability is equal to the contractual service margin plus the fulfillment cash flows, and as you might expect, that reflects the value of the premium paid in at the start of the policy.

And we can then roll that forward, and we can see that the insurance contract liability builds throughout the policy as the returns are allocated to the policyholder until they're paid out at the maturity of the policy.

The final thing is the insurance service revenue that's recorded in the income statement each year. That's just the CSM that's going to be released.

So I grab that from above, make that a positive, and we have the insurance service revenue for the income statement.

And that is the variable fee approach under IFRS.