Reviewing an IFRS 17 BEL analysis of movement

The best estimate liability (BEL) analysis of movement (AoM) rolls the liability for remaining coverage (LFRC) BEL forward from opening to closing, and it is the primary diagnostic for whether the IFRS 17 GMM measurement is behaving as expected. Getting comfort on the BEL movements comes first, because those movements are what pull through to insurance revenue, insurance finance income and expense (IFIE), and the contractual service margin (CSM) and loss-component unlocks. Comfort on the BEL is therefore comfort on the major items that drive the income statement.

IFRS 17 frames the same reconciliation in its disclosure requirements: paragraph 100 requires the opening-to-closing balances of the LFRC and the liability for incurred claims (LIC) to be reconciled separately; paragraph 101 splits the GMM LFRC further into the present value of future cash flows, the risk adjustment (RA), and the CSM; and paragraph 102 sets the objective, to explain the insurance service result. The AoM is that reconciliation, read as a review tool.

Reading the AoM correctly means following the waterfall in the order the engine produces it, reading movements per cash-flow type rather than on the total BEL, and carrying a parallel RA walk alongside the BEL. The steps below set out how each stage of the waterfall works and what to check at each.

The attribution logic in paragraph 104 organises the stages: changes relate to future service (adjusting the CSM or creating a loss component), current service (releasing the CSM, RA, and processing current-period experience), or past service (re-estimating liabilities for claims that have already been incurred). Paragraph 105 adds cash flows and insurance finance income and expense. Every line in the AoM sits in one of these categories — and which category it sits in determines whether it reaches the P&L now or adjusts a balance that will release in future periods.

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Step 1 — Opening position: decompose by cash-flow type

The place to start is the decomposition by cash-flow type — projected premiums (an asset-like inflow), projected claims, and projected expenses — rather than the total BEL. The total BEL is a net figure — it combines inflows that reduce the liability with outflows that increase it — and a change in the total can reflect a mix shift that is invisible on the aggregate line.

At opening, the cash-flow decomposition sets the baseline for every subsequent movement. A useful check is the present value of each cash-flow type from the discounted cash flow (DCF) results: whether the split between premium, claims, and expense PVs makes sense given the book's structure and combined ratio. A claims PV that has grown materially relative to premium PV signals either a worse loss ratio or a different mix of remaining cover — worth identifying before reading any of the movement steps that follow.

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Step 2 — New business: initial recognition and the onerousness test

The new-business step adds the cash flows of contracts recognised in the period, measured at initial recognition. The diagnostic check at this stage is to express each cash-flow type as a percentage of premium: a loss ratio, an expense ratio, and a combined ratio. These ratios characterise the profitability profile of the new cohort and can be monitored period-on-period against prior-year cohorts and against the underwriting business case.

The combined ratio at initial recognition determines whether a new cohort creates a CSM or a loss component. Where inflows exceed outflows (combined ratio below 100% on a discounted basis), a CSM is created, and the profit is deferred into the balance sheet to emerge as the entity provides insurance coverage. Where outflows exceed inflows (combined ratio above 100%), the cohort is onerous at initial recognition under paragraph 47: no CSM is created; instead, the excess of outflows over inflows hits the P&L immediately as a day-1 loss, and a loss component is established against the LFRC. The ratio is the diagnostic; paragraph 47 is the consequence. A cohort with a combined ratio of 95% produces a healthy CSM; a cohort at 105% produces a loss-component posting.

It is worth monitoring new-business margins period-on-period and against profit expectations, since the cohort written today will release its CSM and RA into revenue over the coverage period. A deteriorating new-business margin that is not identified at initial recognition will suppress future CSM release.

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Step 3 — Realised cash flows: read per type, not on the total

The realised cash flow step reflects premiums received and expenses and claims paid during the period. Because the BEL includes the expected timing of these cash flows, the step should not change the total reserve significantly if experience is running in line with expectations — the cash receipt of a premium that was already in the BEL is a wash at the PV level. Deviations from expected, however, create an experience variance.

The useful check here is to read the movement per cash-flow type: the change in the premium BEL driven by actual premiums received, the change in claims BEL driven by actual claims paid, and the change in expense BEL driven by actual expenses paid. Reading each type separately makes it possible to see whether a claims experience variance is concentrated in a specific cohort or age of policy, which is obscured on the aggregate.

Experience variances for the current service period post to the P&L (paragraph B97). Where a variance relates to future-service cash flows — for example, a change in expected future premiums driven by an observed lapse in premium-paying policies — the variance adjusts the CSM (paragraph B96(a)).

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Step 4 — Financial unwind: the accretion of discount

The financial unwind — the accretion of interest on the BEL at the current discount rate — reflects the passage of time: the present value of future cash flows increases as they move one period closer to payment.

The BEL unwinds at the current discount rate (paragraph 36), not at a locked-in rate. The CSM, by contrast, accretes at the locked-in rate set at initial recognition of the cohort (paragraph B72). The two rates do not move in lockstep, and a forecast that applies the same rate to both will misstate the CSM balance and the IFIE split.

The financial unwind is the component that posts to insurance finance income and expense, not to the insurance service result. The unwind is therefore a non-service movement that runs outside the revenue and expense lines. A sense-check for the unwind amount: it should approximate the opening BEL per cash-flow type times the period's discount rate. Reading it per cash-flow type again helps identify whether the unwind is dominated by the claims leg (long-tail, high PV, slow runoff) or the expense leg (shorter-duration).

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Expected-closing checkpoint

The expected-closing position is a named control point in the AoM: opening BEL plus new business plus realised cash flows plus financial unwind equals the BEL that would have resulted if all assumptions had held exactly as at opening and no new information had arrived.

This checkpoint is a diagnostic. If the expected-closing figure does not make sense relative to opening — it is implausibly different, or it moves in the wrong direction for the portfolio's stage of run-off — something in steps 2 through 4 is worth revisiting before reading the assumption-update steps. All the steps from data update onward are incremental changes to this base; if the base is wrong, the increments will be misread.

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Step 5 — Data update: in-force refresh

The data update step reflects the refresh of the model-point file — the set of policies in force as at the valuation date. The differences from expected produce changes in the BEL because actual policies in force differ from the cohort that was projected to be in force.

The drivers of data-update movements are the "off rates" relative to expected: actual lapses versus assumed lapses, actual deaths versus assumed deaths, and any policyholder-initiated changes to premium, sum assured, or policy terms where the contract permits them. Actual lapses above the assumed rate reduce the in-force count and therefore reduce the claims and expense BEL; mortality above assumed reduces the in-force (for life covers) and increases claims for those who have died. Mix shifts within the in-force — changes in the proportion of high-sum-assured policies, for example — can also move the BEL without any change in the total policy count.

The data update has two components, attributed to different service periods. The current-period experience variance — actual in-force versus the in-force expected for the period — is a current-service movement and posts to the P&L (paragraph B97). Where the revised in-force count also changes the projected future cash flows, such as fewer future premiums and claims because more policies lapsed than assumed, that element is a change in the estimate of future-service cash flows and adjusts the CSM (paragraph B96(a)–(b)).

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Step 6 — Non-financial assumption update: trace each cash-flow leg

Non-financial assumption updates reflect changes to the expense, mortality, lapse, and (for non-life) loss-ratio assumptions. These are typically sourced from experience investigations, which assess how actual experience over recent periods compares to what was assumed.

The logic of each assumption update's effect on the BEL runs through the cash-flow type it affects. An expense-assumption strengthening (higher assumed expenses) increases the expense leg of the BEL; a lapse-rate revision changes the premium, claims, and expense legs together via its effect on the projected in-force count; a mortality revision in a life-cover context increases the claims leg and decreases the in-force leg. Reading the update per cash-flow type makes the direction and magnitude of each revision interpretable. The aggregate BEL change from a combined mortality and lapse revision is often less clear than either revision read separately.

Non-financial assumption changes relate to future-service cash flows and therefore adjust the CSM (paragraph B96(d) for future-service RA changes; B96(a)–(b) for FCF changes). Where a group is onerous, a favourable change relating to future service reduces the loss component before any CSM is re-established (paragraph 50(b)); an adverse change relating to future service increases the loss component (paragraph 48).

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Step 7 — Financial assumption update: curve and inflation

Financial assumption updates reflect changes in the discount curve and inflation assumptions. These affect the present value of all future cash flows; the RA, being a load on the present value, moves with it.

A modified-duration approximation provides a useful direction-and-magnitude check: BEL impact ≈ change in yield × discounted-mean-term × present value of future cash flows. This is an approximation — not a canonical calculation step — but it gives the right direction and order of magnitude. The direction test: a parallel curve rise reduces the present value of a positive-duration liability's future outflows, so a rising curve lowers the claims and expense BEL. The premium BEL, being an inflow, moves in the opposite direction. The net BEL impact depends on the relative duration of inflows and outflows for the specific portfolio.

The financial assumption update posts to insurance finance income and expense, not to the insurance service result.

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The parallel RA walk

Alongside the BEL waterfall, a parallel walk for the RA is worth maintaining. The RA has its own opening balance, its own new-business recognition (at initial recognition the RA is set using the entity's own principle-based technique, disclosed as an equivalent confidence level under paragraph 119), its own financial unwind (at the current rate), and its own release pattern as risk expires during the coverage period.

The RA release for the current period posts to insurance revenue (paragraph B124(b)) as part of the insurance service result. Future-service RA changes — where a non-financial assumption update changes the RA that relates to remaining coverage — adjust the CSM (paragraph B96(d)). Financial-risk RA changes flow to IFIE. The RA walk mirrors the BEL waterfall: at the data update and the non-financial and financial assumption updates, the RA moves with the BEL at the same RA%. On top of those BEL-driven movements, the RA% itself is re-assessed — the RA's own line, and the one step the BEL walk does not have. A well-constructed model shows both.

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From BEL comfort to the CSM and loss-component unlock

Comfort on the BEL movements is the foundation. Once the roll-forward and the assumption impacts per cash-flow type are understood, the next step is to confirm those BEL impacts pull through correctly to the downstream balances: insurance revenue, IFIE, and the CSM and loss-component unlocks. The pull-through mechanics, such as how a future-service assumption change adjusts the CSM under paragraph B96 and how the RA release reaches revenue, are built into the engine and validated at implementation. What the AoM review adds is the storyline behind them.

The storyline that matters is which groups switched between a CSM and a loss component during the period, and why. A group that moves from a CSM to a loss component has seen an adverse future-service change large enough to exhaust the CSM (paragraph 48); the excess is a loss recognised in the P&L immediately, and a loss component is set up. A group that moves from a loss component back to a CSM has seen a favourable future-service change that clears the loss component (paragraph 50(b)), with the loss reversing through the P&L and the excess re-establishing a CSM that will release as coverage units. Reading these switches at the AoM stage explains the insurance service result this period and the shape of revenue in the periods that follow.

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What the AoM is actually for

The AoM waterfall is the primary bridge from the balance sheet to the income statement. Each step in the waterfall is attributable either to service (and flows to the insurance service result), to the passage of time (and flows to IFIE), or to a re-estimate of future service (and adjusts the CSM or loss component). A step that posts in the wrong category — an assumption change that hits the P&L as a current-service item when it should adjust the CSM as a future-service item, for example — will distort both the service result and the CSM balance, with compounding effects across future periods.

Reading the AoM step-by-step, per cash-flow type, with a parallel RA walk, in the engine-canonical order from opening through to closing, is the method by which the measurement is interrogated and the P&L is understood.

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From review to engagement

If you are building or reviewing an IFRS 17 GMM AoM — whether in a valuation cycle, a budget process, or a model audit — work on the methodology, the engine configuration, or the review framework sits within the scope of the IFRS 17 work on this site.