Liability for incurred claims (LIC, IFRS 17)

When a hurricane hits a portfolio on September 14, the liability for remaining coverage on the contract falls and another balance sheet line grows: the liability for incurred claims. Paragraph 40(b) of IFRS 17 defines it as the fulfilment cash flows relating to past service, that is, claims that have occurred, reported or not, plus other insurance expenses already incurred. It replaces the outstanding claims and incurred but not reported (IBNR) provisions of local standards, with two sizeable differences. It is discounted, except under the simplified approach if settlement is expected within twelve months, where the entity may skip discounting. And it carries a risk adjustment, which pays for uncertainty in the amount and timing of payments, which a conventional accounting provision used to hide in its prudence. Revisions of estimates on past claims go straight through profit or loss, in incurred claims within the insurance service result, and the unwinding goes in finance expenses. A long-tail insurer, in liability or annuities, sees much discounting and a rate effect; a short-tail insurer sees nothing significant. The notes detail the reconciliation between opening and closing balances, which makes the run-off gains and losses that local accounts sometimes hid in prudence readable.