Investment type policies are those where most of the investment risk usually born by the insurance company is actually born by the policy holder.

So the death benefit varies with changes in interest rates or investment performance of a fund.

The insurance risk is therefore pretty low on these policies and investment type policies also usually allow the policy holder some flexibility over the amount of premiums paid.

So in essence, these policies behave more like investment products than insurance products and special accounting rules have been developed to reflect this.

They're usually applied for universal life policies and unit-linked policies. Whilst premium is usually treated as revenue for an insurance company, in this situation, they're treated as a customer deposit in the same way as a bank would treat a deposit.

So they're recorded in liabilities, but in this case, because we're dealing with an insurance company, it sits within insurance reserves.

Then as investment returns are generated on this deposit, which accrue to the policy holder, they're added to the insurance reserves.

Now because these are a separate category of reserves, they're usually separately identified on the face of the balance sheet and labeled as reserves where the investment risk is born by the policy holder.

Any investments which back these policies, for example, the investment funds in the case of unit linked policies are recorded in the balance sheet, but are separately classified as investments where the investment risk is born by the policy holder.

Now, where the insurance company has provided any specific guarantees to the policy holder, such as a minimum interest rate guarantee or a guaranteed minimum death benefit, then the value of this guarantee is added to the insurance reserves.

So now we know what happens in the balance sheet.

Let's think about what happens in earnings.

And because premiums are now recorded within reserves, the revenues only reflect fees which are deducted from the policy holder's account.

And typically this would include the cost of insurance charges in respect of any guaranteed benefits, any surrender fees charged and asset management charges.

Also remember that the insurance company will continue to recognize investment returns generated by the investments even if these are subsequently credited to the policy holder.

It's also important to note that the benefits expense no longer reflects all the changes in reserves because some of this is just a function of the premiums paid by the policy holders.

So now this just shows any interest and investment returns credited to the policy holders along with the effects of any guaranteed benefits.