(paragraphs 45 and B101-B118 of IFRS 17)

BC238 Insurance contracts with direct participation features are insurance contracts for which, on inception:

(a) the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items;

(b) the entity expects to pay to the policyholder an amount equal to a substantial share of the fair value returns from the underlying items; and

(c) the entity expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items.

BC239 The Board views these contracts as creating an obligation to pay policyholders an amount equal in value to specified underlying items, minus a variable fee for service. That fee is an amount equal to the entity's share of the fair value of the underlying items minus any expected cash flows that do not vary directly with the underlying items.

BC240 IFRS 17 requires the contractual service margin for insurance contracts with direct participation features to be updated for more changes than those affecting the contractual service margin for other insurance contracts. In addition to the adjustments made for other insurance contracts, the contractual service margin for insurance contracts with direct participation features is also adjusted for the effect of changes in: