Definition:Underlying items
📦 Underlying items are the pool of assets, reference portfolios, or contractual benchmarks to which returns under certain insurance contracts are explicitly linked, determining the amounts payable to policyholders. The term has particular technical precision under IFRS 17, where it is central to the identification of contracts with direct participation features — those under which the policyholder shares in the returns of a clearly identified pool of underlying items. Typical examples include unit-linked fund portfolios, with-profits asset pools, and segregated investment accounts backing participating life insurance policies. The nature and composition of underlying items directly influence how the insurer measures its obligations and recognizes profit over time.
🔧 Under IFRS 17's variable fee approach, the insurer's obligation to the policyholder is treated as a variable fee for services — essentially the insurer's share of the returns on the underlying items, adjusted for guarantees and other contract features. At each reporting period, changes in the fair value of the underlying items flow through the measurement of the insurance contract liability, with the insurer's share adjusting the contractual service margin rather than hitting profit or loss immediately. This mechanism was designed to reflect the economic reality that in participating and unit-linked business, the insurer acts partly as an asset manager whose compensation varies with investment performance. The identification of what qualifies as underlying items — and whether they are "clearly identified" as IFRS 17 requires — has been one of the more challenging implementation questions for insurers globally, particularly for traditional with-profits funds in the UK and European participating contracts where the asset pool is not ring-fenced in a straightforward way.
🌐 Beyond accounting, the concept of underlying items shapes asset-liability management strategies, product design decisions, and regulatory outcomes across multiple jurisdictions. When underlying items consist primarily of equities or real estate, the insurer and policyholder share in significant market volatility, which affects solvency capital requirements under frameworks like Solvency II and C-ROSS. Product innovation in insurtech and digital distribution has also expanded the range of what might serve as underlying items, with index-linked and exchange-traded fund-based products gaining traction in several Asian and European markets. For investors and analysts, understanding the composition and risk profile of an insurer's underlying items is essential to assessing the volatility of future earnings and the sustainability of dividend capacity in participating business lines.
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