IFRS 17 · Ep 6

Section 01

What Is the LIC?

IFRS 17 splits every group of insurance contracts into two liabilities (Para 40). The liability for remaining coverage (LRC) covers service the insurer has not yet provided. The liability for incurred claims (LIC) covers service already provided: claims for insured events that have happened, whether or not they have been reported yet.

The LIC is the entity's obligation to investigate and pay valid claims for insured events that have already occurred, including events not yet reported, and other incurred insurance expenses, plus amounts relating to past service or investment components that are not in the LRC.

— Paraphrased from IFRS 17 Appendix A, "liability for incurred claims"

The trigger is the insured event, not the claim report or the payment. On the day a car is damaged, the expected cost of that claim leaves the LRC and enters the LIC, even if the policyholder only files the claim two months later. That gap between occurrence and report is exactly what IBNR captures.

Covers

Past service

Events that have already happened

Measured as

FCF only

PV of cash flows + risk adjustment

CSM

None

No future service left to earn

Model

GMM = PAA

Same measurement under both

IFRS 17 Para 40(a)–(b) · Appendix A definitions

Section 02

Measurement: Fulfilment Cash Flows Only

At each reporting date, Para 40(b) measures the LIC as the fulfilment cash flows relating to past service. Those are built from the same blocks as in Episode 1, but without a CSM.

LIC at each reporting date

LIC = PV(future claim & claims-handling cash flows) + RA

Unbiased current estimates (Para 33) · discounted at current rates (Para 36) · plus risk adjustment for non-financial risk (Para 37)

Block 1 · Para 33–35

Estimates of future cash flows

Explicit, unbiased, probability-weighted estimates of all claim payments and claims-handling costs within the contract boundary, using all reasonable and supportable information (B37–B41, B65).

Block 2 · Para 36

Time value of money

Discounted at current rates that reflect the timing, currency and liquidity of the claim payments. For Indonesian insurers, the bottom-up SBN curve from Episode 4.

Block 3 · Para 37

Risk adjustment

The compensation the entity requires for bearing uncertainty in the amount and timing of the claims, for example a reserve developing worse than expected.

Why no CSM? The CSM is unearned profit released as the insurer provides future service. Once the insured event has happened, the service has been provided and there is nothing left to defer. Any change in the estimate of incurred claims therefore goes straight to P&L (Section 10).

PAA link: under the PAA, the LIC is measured exactly as above. The only relief is Para 59(b): if claims are expected to be paid within one year of the date they are incurred, the entity may choose not to discount them.

IFRS 17 Para 33–37, 40(b), 59(b), B37–B41, B65

Section 03

What Sits Inside Unpaid Claims

The undiscounted estimate of unpaid claims is usually built from four layers. Only the first is a known list of claims; the others must be projected.

Case reserves (outstanding claims)

Reported claims not yet fully paid, estimated claim by claim by the claims department from the information on file.

IBNER: incurred but not enough reported

The expected future development on reported claims: case estimates that will still go up (or down) as more information arrives.

Pure IBNR: incurred but not reported

Claims for events that have already happened but that the insurer does not yet know about. Only an actuarial projection can estimate these.

Claims handling costs

Allocated and unallocated loss adjustment expenses needed to settle all of the above. Para B65(e) includes claims handling costs in the fulfilment cash flows.

In practice, layers 2 and 3 are estimated together as "IBNR" in the broad sense. IFRS 17 does not prescribe any reserving method; it requires the result to be an unbiased current estimate. The rest of this episode applies two standard triangle methods to one illustrative portfolio.

IFRS 17 Para 33, B65(e) · Friedland (2010), Chapters 1–2

Section 04

The Claims Development Triangle

A development triangle arranges claims by accident year (rows: when the event happened) and development year (columns: how long after). Each cell shows cumulative claims paid by the end of that development year. The diagonal is the latest valuation date; everything below it is the future we need to estimate.

Illustrative motor portfolio · cumulative paid claims · Rp million · valuation date 31 December 2025:

Accident year	Dev 1	Dev 2	Dev 3	Dev 4	Earned premium
2022	400	640	736	760	1,100
2023	450	702	810	–	1,200
2024	500	800	–	–	1,300
2025	560	–	–	–	1,450

Paid or incurred? A paid triangle (used here) projects total unpaid claims, case reserves and IBNR together. An incurred triangle (paid plus case reserves) projects IBNR only, then case reserves are added back. Many actuaries run both and compare. The example assumes development is complete after four years (no tail factor).

Friedland (2010) · Data illustrative, not from any company

Section 05

Method 1: Chain Ladder

The chain ladder assumes each accident year will develop in the same proportions as earlier years have. It has three steps.

Step 1 · Age-to-age (link) factors, volume-weighted

f_j = Σ_i C_{i, j+1} / Σ_i C_{i, j}

Sum over accident years i with data in both columns · e.g. f₁ = (640 + 702 + 800) / (400 + 450 + 500) = 1.5867

Step 2 · Cumulative development factor (CDF) to ultimate

CDF_j = f_j × f_j+1 × … × f_n−1

CDF from Dev 1 = 1.5867 × 1.1520 × 1.0326 = 1.8875

Step 3 · Ultimate and unpaid

Ultimate_i = C_{i, latest} × CDF · Unpaid_i = Ultimate_i − C_{i, latest}

The unpaid amount is the reserve for case + IBNR on a paid basis

Projected triangle (projected cells in gold italics):

Accident year	Dev 1	Dev 2	Dev 3	Dev 4 = Ultimate	CDF used	CL unpaid
2022	400	640	736	760.0	1.0000	0.0
2023	450	702	810	836.4	1.0326	26.4
2024	500	800	921.6	951.7	1.1896	151.7
2025	560	888.5	1,023.6	1,057.0	1.8875	497.0
Total						675.1

Strength

Fully driven by the data

Simple, transparent and responsive to the portfolio's own experience. Works well for mature accident years with stable development.

Weakness

Leverage on immature years

2025 has one diagonal of data multiplied by 1.8875. If the 2025 first-year payments were 10% higher by chance, its ultimate and its reserve would both rise by 10%. It also breaks down when claims handling, mix or inflation change.

Uncertainty: Mack (1993) derived a distribution-free standard error for chain ladder reserves, and bootstrapping the residuals gives a full distribution. Either can feed the risk adjustment (Section 09).

Mack (1993) · Friedland (2010), Chapter 7 · IFRS 17 Para 33

Section 06

Method 2: Bornhuetter-Ferguson

Bornhuetter and Ferguson (1972) proposed taking the development pattern from the triangle but the size of the remaining claims from an independent prior: earned premium multiplied by an expected loss ratio (ELR), typically from pricing, business plans or the experience of mature years.

BF unpaid and ultimate

Unpaid_i = EP_i × ELR × (1 − 1/CDF_i) · Ultimate_i = C_{i, latest} + Unpaid_i

1/CDF = share of ultimate expected to be paid by now · (1 − 1/CDF) = share still to come

With an ELR of 70% for every accident year:

Accident year	Earned premium	Prior ultimate (× 70%)	% unpaid (1 − 1/CDF)	BF unpaid	BF ultimate
2022	1,100	770.0	0.0%	0.0	760.0
2023	1,200	840.0	3.2%	26.5	836.5
2024	1,300	910.0	15.9%	145.0	945.0
2025	1,450	1,015.0	47.0%	477.2	1,037.2
Total				648.8

BF as a credibility weighting

Ultimate_BF = Z × Ultimate_CL + (1 − Z) × Ultimate_prior, with Z = 1/CDF

2025: Z = 0.530 → 0.530 × 1,057.0 + 0.470 × 1,015.0 = 1,037.2 · mature years get Z near 1, so BF converges to chain ladder

Benktander: using the BF ultimate as a new prior and applying BF again gives the Benktander method, a credibility weighting between BF and chain ladder (Mack, 2000). Repeating the step converges to the chain ladder.

Watch the prior: BF is only as good as the ELR. If the 2025 business was underpriced, a 70% prior understates the reserve, and the triangle will take years to correct it. Document where the ELR comes from and back-test it against mature years.

Bornhuetter & Ferguson (1972) · Mack (2000) · Friedland (2010), Chapter 9 · Figures rounded to one decimal; totals may differ by 0.1

Section 07

Comparing and Selecting the Estimate

Reserving actuaries rarely use a single method for every year. A common selection is the chain ladder for mature years, where the data is credible, and BF for the most recent year, where it is not.

Accident year	Chain ladder	BF	Difference	Selected	Basis
2022	0.0	0.0	0.0	0.0	Fully developed
2023	26.4	26.5	−0.1	26.4	CL · 97% developed
2024	151.7	145.0	+6.6	151.7	CL · 84% developed
2025	497.0	477.2	+19.7	477.2	BF · 53% developed
Total	675.1	648.8	+26.3	655.3

Dimension	Chain ladder	Bornhuetter-Ferguson
Main input	Triangle only	Triangle pattern + premium × ELR
Best for	Mature years, stable development	Immature years, new products, thin data
Reacts to a large early claim	Fully, multiplied by the CDF	Partially, only through paid to date
Main risk	Leverage on the latest diagonal	A biased prior loss ratio
IFRS 17 fit	Either is acceptable if the selected result is an unbiased current estimate (Para 33)

Reading the gap: the triangle implies a 2025 loss ratio of 72.9% (1,057.0 / 1,450) against a 70% prior. The selection of 655.3 is a judgement that one year of data is not yet enough to move away from the plan. That judgement, and its review as 2025 matures, belongs in the reserving report.

IFRS 17 Para 33(a) · Friedland (2010), Chapter 15 · Figures rounded to one decimal; totals may differ by 0.1

Section 08

From Reserve to LIC: Discounting

The selected Rp 655.3m is undiscounted. IFRS 17 needs the timing of payments. Applying each accident year's incremental chain ladder pattern to its selected reserve gives expected payments by calendar year, which are then discounted. The example uses a flat 6.5% and mid-year payment timing for clarity; in practice each year's cash flow is discounted at its own point on the SBN-based curve from Episode 4.

Payment year	From AY 2023	From AY 2024	From AY 2025	Total cash flow	t (years)	DF at 6.5%	PV
2026	26.4	121.6	315.5	463.5	0.5	0.9690	449.1
2027	–	30.1	129.7	159.8	1.5	0.9099	145.4
2028	–	–	32.1	32.1	2.5	0.8543	27.4
Total	26.4	151.7	477.2	655.3			621.9

Undiscounted

655.3

Selected unpaid claims

Discounting

−33.4

5.1% of the reserve

Risk adjustment

+43.5

7% of PV (assumed)

LIC

665.4

Rp million

Para 59(b) does not apply here: 29% of the payments fall more than a year out, so the no-discount option for claims paid within one year is not available for this portfolio as a whole. For very short-tail lines, such as some property claims, it may be.

Which rate? The LIC is always measured at current rates (Para 36). If the entity chooses to disaggregate insurance finance income or expense between P&L and OCI (Para 88(b)), the P&L uses the rate at the date the claims were incurred for PAA groups (B72(e)(iii)), and the difference from the current rate goes to OCI.

IFRS 17 Para 36, 59(b), 88, B72(e)(iii) · Episode 4 for the SBN curve · Figures rounded to one decimal; totals may differ by 0.1

Section 09

The Risk Adjustment on Incurred Claims

The best estimate is a mean. The real outcome will be higher or lower, and the risk adjustment is the compensation the entity requires for that uncertainty (Para 37). For the LIC the uncertainty is mainly reserve risk: development worse than the triangle suggests, inflation in repair costs, or late reported large claims.

Approach 1

Confidence level

Build a distribution of the reserve (Mack, bootstrap or stochastic BF) and set the RA as, say, the 75th percentile minus the mean.

Approach 2

Cost of capital

Project the capital held for reserve risk until claims run off and charge a cost of capital rate on it, then discount.

Approach 3

Margin

A percentage of the PV, as in this example (7%). Simple, but it must still be justified against B91's characteristics.

B91 gives the logic: the RA should be larger for less known risks, longer duration, wider distributions and when emerging experience reduces less uncertainty. So the RA as a percentage of reserves is typically higher for long-tail lines than for motor. Whatever the method, Para 119 requires disclosure of the confidence level the total RA corresponds to. Episode 7 covers the RA in full.

IFRS 17 Para 37, 119, B86–B92 · Mack (1993)

Section 10

The LIC in the P&L

Each movement in the LIC between two reporting dates lands in one of two places in the statement of financial performance.

Movement	Where it goes	Reference
New claims incurred in the period	Insurance service expense	Para 84, 103(b)(i)
Changes in estimates of past claims	Insurance service expense (no CSM to absorb them)	Para 103(b)(iii)
Release of RA as claims settle	Insurance service result, unless the time-value part is split out	Para 81
Unwinding of the discount	Insurance finance income or expense	Para 87
Effect of interest rate changes	Insurance finance income or expense, or OCI under the option	Para 87–89
Claims paid	Reduce the LIC (cash, not P&L)	Para 105(a)

Reserve releases are visible: if the 2025 accident year develops better than the selected estimate, the release shows in the insurance service result in the year it is recognised. Under IFRS 17 this "prior-year development" can be read directly from the LIC reconciliation (Section 11).

IFRS 17 Para 81, 84, 87–89, 103

Section 11

Disclosure and the Indonesian Context

Para 100

LRC / LIC reconciliation

Opening to closing balance of the LIC, showing incurred claims, changes relating to past service, finance effects and claims paid, separately for the PV and the RA.

Para 130

Claims development table

Actual claims compared with previous undiscounted estimates, for up to ten years, reconciled to the LIC. Not required where uncertainty typically resolves within one year.

Para C28

Transition relief

On first application, the entity need not disclose previously unpublished development for claims that occurred more than five years before the end of the first annual reporting period.

For Indonesian general insurers reporting under PSAK 117 from 1 January 2025, the LIC is typically the largest insurance liability, because short-duration motor, property and health business is usually measured under the PAA, where the LRC is small. Three practical points stand out:

Discounting is new for many lines

Where claims reserves were previously held undiscounted, PSAK 117 now requires discounting unless the 59(b) option applies, which ties the reserving team to the discount-rate process from Episode 4.

The RA needs a documented method

An explicit RA with a disclosed confidence level replaces implicit margins, which means a stochastic or cost-of-capital model for reserve risk.

Development tables become public

The Para 130 table shows readers how well past reserves held up, so method selection (Section 07) is visible to analysts.

IFRS 17 Para 100, 130, C28 · PSAK 117 effective 1 January 2025

Episode 6 — Key Takeaways

📌

The LIC is never simplified — under GMM and PAA alike, it is the PV of unpaid claims and claims-handling costs plus a risk adjustment, with no CSM (Para 40(b)).

🔺

The triangle drives the estimate — chain ladder projects each year with the portfolio's own development pattern; it is reliable for mature years but leveraged on the latest diagonal.

⚖️

BF stabilises immature years — it combines the development pattern with premium × expected loss ratio, and is a credibility weighting with Z = 1/CDF.

📐

Discount and add the RA — Rp 655.3m selected becomes Rp 621.9m PV and Rp 665.4m LIC in the example. Para 59(b) relief only applies to claims paid within a year.

📊

Movements are transparent — new claims and reserve changes go to insurance service expense, discount unwind and rate effects to finance income or expense, and Para 130 shows the development history.

Coming next · Episode 7

Risk Adjustment for Non-Financial Risk

Confidence level, cost of capital and the Para 119 disclosure: why two insurers with the same risks can report different RAs, and both be right.

Episode 5: PAA Back to Series

Liability for Incurred Claims