You're both right, it is a shader but it is expensive in render times. It is a raytrace call that determines how light would bounce around and reflect/refract etc in skin. (and other stuff too).

It's a subtle effect but if you get a torch and shine it through some skin that's the sort of stuff you would notice more. We are currently using it to do some stuff (which I can't elaborate on so don't ask me to!! ) It's got nothing to do with simulating hair etc. It might be used in a hair render perhaps but not in the simulation of it.

Alan