The variable fee approach

Unit-linked and with-profits business makes up much of the life insurance market, and IFRS 17 treats it differently from protection products. Under the variable fee approach, market movements on the insurer's fees flow into the CSM and emerge as profit over time. This guide explains the eligibility test, works through a unit-linked fund, and covers the risk mitigation option and the presentation of finance income.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 3 minute read.

Short answer

The IFRS 17 variable fee approach (VFA) is a mandatory version of the general measurement model for direct participating contracts, such as unit-linked and with-profits policies, where policyholders receive a substantial share of the returns on a clearly identified pool of underlying items. The insurer's obligation is to pay the fair value of the underlying items less a variable fee for its services. Changes in its share of the underlying items adjust the CSM rather than profit. In this guide's example, a 10% rise in a 10,000 unit-linked fund raises the CSM from 150 to 210.

At a glance

For
Direct participating contracts
Test
Set at inception, not reassessed
Obligation
Fair value of items less the variable fee
Market changes
Insurer's share adjusts the CSM
Risk mitigation
Option to keep hedges out of the CSM
Not for
Reinsurance issued or held
The variable fee approachFor: Direct participating contracts; Test: Set at inception, not reassessed; Obligation: Fair value of items less the variable fee; Market changes: Insurer's share adjusts the CSM; Risk mitigation: Option to keep hedges out of the CSM; Not for: Reinsurance issued or held.KEY FACTS AT A GLANCEThe variable fee approachForDirect participatingcontractsTestSet at inception, notreassessedObligationFair value of items lessthe variable feeMarket changesInsurer's share adjuststhe CSMRisk mitigationOption to keep hedges outof the CSMNot forReinsurance issued orheldTax BakersThe variable fee approachFor: Direct participating contracts; Test: Set at inception, not reassessed; Obligation: Fair value of items less the variable fee; Market changes: Insurer's share adjusts the CSM; Risk mitigation: Option to keep hedges out of the CSM; Not for: Reinsurance issued or held.KEY FACTS AT A GLANCEThe variable fee approachForDirect participating contractsTestSet at inception, not reassessedObligationFair value of items less the variable feeMarket changesInsurer's share adjusts the CSMRisk mitigationOption to keep hedges out of the CSMNot forReinsurance issued or heldTax Bakers
Key facts at a glance, as set out in this guide.

Which contracts use the IFRS 17 variable fee approach?

Insurance contracts with direct participation features, which meet three conditions at inception:

  1. The contract specifies that the policyholder participates in a share of a clearly identified pool of underlying items, such as a fund of investments.
  2. The insurer expects to pay the policyholder an amount equal to a substantial share of the fair value returns on those items.
  3. The insurer expects a substantial proportion of any change in the amounts paid to vary with the change in the fair value of the items.

Most unit-linked policies and many with-profits contracts qualify. The assessment is made when the contract is issued and is not revisited unless the contract is modified. Reinsurance contracts, issued or held, can never use the VFA.

A variable fee approach example: a unit-linked fund

Policyholders' units are worth 10,000. The insurer charges an annual management fee, with a present value of 600; its expected expenses of running the policies have a present value of 400, and the risk adjustment is 50. The variable fee, its share of the fund less the costs that do not vary with it, gives a CSM of 150.

A 10% rise in the fund: where it goesA 10% rise in the fund: where it goesTOPICGeneral modelVariable feePolicyholders' shareLiabilityLiabilityInsurer's share of feesFinance resultCSMProfit nowYesNoProfit laterNoAs CSM is releasedCSM accretionLocked-in rateCurrent rate
The VFA keeps market gains on fees in the CSM.
LiabilityAt inceptionAfter a 10% rise in the fund
Fair value of the underlying items10,00011,000
Less present value of the insurer's fees(600)(660)
Present value of expenses400400
Risk adjustment5050
Contractual service margin150210
Total liability10,00011,000

The rise in the fund belongs to policyholders, so the liability rises by the full 1,000. The insurer's share, 60 more in expected fees, goes into the CSM and will be released over the remaining coverage, rather than appearing as an immediate gain. Under the general measurement model, the same change would have gone to insurance finance income or expense.

How does the VFA differ from the general measurement model?

  • The CSM absorbs changes in the insurer's share of the fair value of underlying items, and changes in fulfilment cash flows that do not vary with them but relate to future service.
  • The CSM is not accreted at a locked-in rate; current rates apply.
  • Coverage units reflect investment-related services as well as insurance cover.

What is the risk mitigation option?

When an insurer hedges its share of the financial risk, for example the guarantees in a with-profits fund, using derivatives, reinsurance held or non-derivative financial instruments at fair value through profit or loss, it may choose not to adjust the CSM for the related changes. They then go to profit or loss alongside the hedge, avoiding a mismatch. The option applies prospectively and needs documented risk management.

How is insurance finance income presented?

An insurer that holds the underlying items can present insurance finance income or expense using the current period book yield approach: the amount in profit or loss equals the income on the underlying items, with any difference in other comprehensive income. This keeps profit free of mismatches between the fund's returns and the liability.

What about pure investment contracts?

Unit-linked contracts with no significant insurance risk are investment contracts measured under IFRS 9, with fees under IFRS 15, unless they have discretionary participation features and the insurer also issues insurance contracts. Classification therefore matters before the VFA is considered. See the contractual service margin, the general measurement model and insurance accounting under IFRS 17.

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Questions people ask

What is the IFRS 17 variable fee approach?

A mandatory adaptation of the general measurement model for direct participating contracts, where changes in the insurer's share of the underlying items adjust the CSM.

Which contracts qualify for the VFA?

Contracts where policyholders participate in a clearly identified pool of underlying items, receive a substantial share of the fair value returns, and the amounts paid vary substantially with those returns.

Can reinsurance use the variable fee approach?

No. Reinsurance contracts issued and held are excluded from the VFA.

What is the risk mitigation option?

An option not to adjust the CSM for changes in financial risk that the insurer hedges, so the effect goes to profit or loss alongside the hedge.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 17 Insurance Contracts

Rules and fees change. If you are reading this long after October 7, 2026, confirm the figures with the source before you rely on them.

InsuranceThe contractual service marginInsuranceThe IFRS 17 general measurement modelInsuranceInsurance accounting: IFRS 17 in practice

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This guide is general information. It is not tax or legal advice for your situation.