How Equity Returns Can Cut the CSM Release

Under the Variable Fee Approach, changes in the fair value of the underlying assets flow into the Contractual Service Margin (CSM) itself, rather than straight to P&L. A bad equity year shrinks the fund, shrinks expected future fees, shrinks the CSM — and shrinks what gets released to profit that year.

Step	Amount
Opening CSM (start of year)	100
Coverage units imply 10% earned this year → expected release	≈ 10
Equities fall 20% → unfavourable CSM adjustment	−12
CSM after adjustment, before release	88
Actual CSM release for the year (≈10% of adjusted CSM)	≈ 8.8

The equity fall didn't just dent investment income — it cut the CSM release, the main driver of insurance service profit, by roughly 12%, on top of any separate investment variance recognised elsewhere in IFRS profit.

The extreme case: a loss component

Key takeaway

VFA-specific: this mechanism applies to participating/unit-linked contracts. Under the general model (typically non-participating protection business), market movements mostly bypass the CSM and hit P&L or OCI directly.
Doubles up in the reconciliation: a sharp equity fall both cuts the CSM release inside operating profit's underlying trend, and reappears as a one-off in the operating-to-IFRS-profit bridge.