Claims Reserving: IBNR & Case Reserves

Why Reserving Matters

An insurance company's financial statements must reflect not just the claims it has already paid, but also the claims it expects to pay in the future. This is what reserving is about.

At any given moment, an insurer has three types of claims obligations:

1. Paid claims: Already settled and paid. These are history: recorded, done.

2. Case reserves (outstanding claims): Claims that have been reported but not yet settled. Each one has an estimated cost: the case reserve, set by the claims handler based on their assessment of likely settlement.

3. IBNR (Incurred But Not Reported): Claims that have happened but haven't been reported yet. The accident occurred, the fire damaged stock, the illness started, but the policyholder hasn't filed a claim yet. These are invisible but real, and the insurer must hold reserves for them.

IBNR is the trickiest concept in insurance accounting. You're setting aside money for events you know happened (statistically) but haven't heard about yet.

How IBNR Works in Practice

Consider motor insurance. You know from experience that:
→60% of motor claims are reported within 1 month of the accident
→25% are reported within 2–3 months
→10% are reported within 4–6 months
→5% take longer than 6 months (especially third-party bodily injury claims involving litigation)

So if you wrote 1,000 motor policies this quarter and your expected claims frequency is 8%, you expect 80 claims. If you've received 50 notifications so far, your IBNR estimate is roughly 30 claims × average claim size.

The chain ladder method is the most commonly used technique to estimate IBNR. It uses the pattern of how claims develop over time: from initial report through to final settlement: to project what the ultimate total will be.

Why this matters in Ghana: IBNR is often underestimated by Ghanaian insurers, particularly for long-tail classes like motor third-party injury. Under-reserving makes the company look more profitable than it really is: until the claims materialise and there's no money to pay them. NIC has been increasingly scrutinising reserve adequacy.

IFRS 17: The New Reality

IFRS 17 (International Financial Reporting Standard 17) is the global standard for insurance contract accounting that Ghana is adopting. It fundamentally changes how insurers recognise revenue and measure liabilities.

For non-actuaries, the key things to understand about IFRS 17:

→Premium is no longer recognised as revenue when received. Instead, revenue is recognised as the insurer provides coverage over the policy period. This prevents companies from booking a full year's premium as revenue on day one.

→The Contractual Service Margin (CSM) represents unearned profit. It's released gradually over the coverage period, smoothing earnings.

→Risk Adjustment is an explicit provision for the uncertainty in cash flows. It replaces the old implicit margins and makes the cost of uncertainty visible.

→Best Estimate Liabilities must use current assumptions, not historical ones. If claims inflation has increased, reserves must reflect today's costs, not last year's.

IFRS 17 is complex, but its purpose is simple: give a true and fair view of an insurer's financial position. For Ghana's insurance industry, it brings much-needed transparency and comparability.