Contracts with direct participation features

Learning objectives

• List the three criteria for an insurance contract with direct participation features: participation in a clearly identified pool of underlying items, a substantial share of the fair value returns, and a substantial proportion of the changes in amounts paid varying with those returns.L1
• Determine, from the terms of a case, whether a contract meets the three criteria.L3

Normative references

• IFRS 17 §B101An insurance contract with direct participation features is one whose terms specify that the policyholder participates in a share of a clearly identified pool of underlying items, for which the entity expects to pay a substantial share of the fair value returns, and expects a substantial proportion of any change in the amounts to be paid to vary with the change in the fair value of the underlying items.
• IFRS 17 §B102The conditions in para. B101 are assessed using the entity's expectations at inception of the contract and are not reassessed afterwards, unless the contract is modified as described in para. 72.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• An insurance contract is a contract with direct participation features as soon as its terms provide for participation in a clearly identified pool of underlying items.L1
• Quartz SA reviews three contracts. Contract 1: the terms provide for participation in a clearly identified fund; the policyholder expects 90% of the fund's returns at fair value, and the amounts paid to the policyholder vary mostly with the fair value of the fund. Contract 2: participation in a clearly identified fund, but the policyholder is entitled to only 5% of the returns, and the amounts paid vary very little with fair value. Contract 3: guaranteed fixed return, with no identified underlying pool. The assessments of "substantial" are case data. Which contracts are contracts with direct participation features?L3