3.3.1 Overview

Variable Fee Approach (VFA) is applied to direct participating contracts. The Variable Fee Approach (VFA) is defined by these criteria, based on policyholders being entitled to a significant share in the profit from an identified pool of underlying items:

• The contractual terms specify that the policyholder participates in a share of an identified pool of underlying items.
• The entity expects to pay the policyholder an amount equal to a substantial share of the fair value returns from the underlying items.
• The entity expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in the fair value of the underlying items.

A variable fee is the insurance contract liability based on the obligation for the entity to pay the policyholder an amount equal to the value of the underlying items and the net of a consideration charged for the contract.

This approach requires that changes to the estimate of the future fees an entity expects to earn from directly participating contract policyholders be adjusted against the CSM. The CSM on direct participating contracts would be recognized in profit or loss as part of the insurance service results based on the passage of time of the entity.

This flexible approach helps to mitigate accounting mismatches. This approach matches assets and liabilities. According to VFA, there is no direct impact on profit and loss. Also, CSM is being released over the contract period. In VFA, the discounting rate will be equal to the current interest rate.