With respect to an insurance contract, direct participation involves multiple distinguishing features such as participation of policyholders in a share of an identifiable pool of underlying items as per the contractual terms. Furthermore, the insurance firm expects to pay the policyholder an amount equal to a substantial portion of the fair value gains on the underlying items and it also expects that a substantial proportion of any change in the amounts payable to the policyholder will vary with the change in fair value of the underlying items.
Insurance contracts with direct participation may be perceived as creating an obligation, on an insurer, to pay policyholders an amount equal to the fair value of the underlying items, less a variable fee for service. As such, these contracts entail provision of investment-related services, which constitute an integral part of insurance coverage.
Contracts with direct participation features are also referred to as contracts with a variable fee.
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