The Liability for Incurred Claims (LIC) covers obligations from claims that have already happened, even if not yet reported. The Liability for Remaining Coverage (LRC) covers future services still to be delivered under active policies. These two components split the total insurance liability under IFRS 17.
What the LIC includes
The LIC captures all claims arising from events that occurred before the reporting date. This includes paid claims not yet settled, claims reported but not fully processed, and incurred but not reported (IBNR) claims. For example, in health insurance, if a policyholder received treatment last month but the claim hasn’t been filed, the expected cost is part of the LIC.
It is based on best estimates of future cash outflows related to these past events, reduced by any recoveries such as reinsurance. Future premiums are not included. The discount rate used is typically lower than for the LRC, reflecting shorter payout periods and less uncertainty.
What the LRC includes
The LRC represents the insurer’s obligation to provide coverage for the remaining term of active policies. It includes expected future claims, administrative expenses, risk adjustments, and a share of the Contractual Service Margin (CSM). For a motor policy with six months left, the LRC covers the cost of claims and service delivery over those months.
Unlike the LIC, the LRC includes future premiums. These are factored into the calculation of profit and loss over time. The LRC also incorporates assumptions about policyholder behavior, such as lapse rates and renewals, making it more sensitive to model risk.
How they differ in profit recognition
Profit under IFRS 17 is recognized through the release of the CSM, which is part of the LRC. As services are delivered over time, a portion of the CSM is amortized into profit. The LIC does not include the CSM and does not contribute to profit recognition in this way.
A spike in claims will increase the LIC and reduce profit immediately. However, if future expectations improve—such as lower projected claims—the LRC may release more CSM, increasing future profitability. This separation makes earnings more transparent but also more volatile.
Discounting and risk adjustments
Both LIC and LRC use risk-adjusted discount rates, but the inputs differ. The LIC’s cash flows are shorter-term and more predictable, so the risk adjustment is usually smaller. It focuses on uncertainty in claim timing and severity.
The LRC covers longer periods and includes more variables, lapse rates, expense inflation, investment returns, so its risk adjustment is broader. Insurers may use different discounting methods, such as applying a single rate or separate rates for claims and expenses, as long as the approach is consistent and disclosed.
Recalculation and reporting frequency
LIC and LRC are recalculated each quarter using current assumptions. This means changes in claims experience, lapse behavior, or economic conditions directly impact the reported liabilities. Major events like natural disasters or regulatory shifts can trigger immediate updates.
Because both components rely on up-to-date estimates, the values can fluctuate. Over time, as models stabilize and data accumulates, volatility tends to decrease, but ongoing judgment remains a key part of the process.