IFRS has modified accounting rules for policies where the profits are affected by the performance of underlying investments.

This modified approach is referred to as the variable fee approach.

This approach is primarily used for participating policies.

These are policies where the investment returns of a pool of assets are shared between the insurer and the policyholder.

In this situation, the accounting takes the view that the insurance company's fee reflects the insurer's share of investment returns, and this fee is the contractual service margin.

The starting point for this approach is the same as for the general model, which is that reserves reflect the present value of future benefits and expenses, plus the risk margin, plus the contractual service margin, less the present value of premiums. This includes expectations of investment returns at inception.

Also, just like the general model, the value of reserves are updated each balance sheet date to reflect current estimates and current discount rates. However, the difference with the variable fee approach is that the contractual service margin is also updated to reflect actual versus expected returns.

So if actual returns exceed expected returns, there is an increase in the contractual service margin, and that's the future fees from the contract. And this additional fee is gradually released to earnings.

This means that the contractual service margin reflects a fee which varies as investment returns exceed or are less than initial expectations.