What Is Incurred But Not Reported (IBNR)?
Incurred but not reported (IBNR) serves as a crucial reserve account within the insurance sector. This reserve anticipates claims or events that have occurred but are yet to be reported to the insurance company.
In IBNR scenarios, actuaries estimate future damages, prompting insurance companies to establish reserves to cover such anticipated losses. These events and losses represent what actuaries term as “incurred but not reported.”
Key Takeaways
- Incurred but not reported (IBNR) acts as a reserve account for insurance companies to cater for unreported claims.
- IBNR is commonly linked to delays caused by bureaucratic processes and processing lags.
- Since IBNR claims signify potential liabilities, it is crucial for companies to accurately estimate the necessary reserve funds.
How Incurred But Not Reported (IBNR) Works
IBNR finds extensive use among insurance companies, especially in regions like the East and Gulf Coasts of the USA, prone to natural disasters like hurricanes. After a disaster, actuaries predict potential damages and projected claims, setting aside funds in a reserve to cover such claims. Despite the losses being incurred, they are yet to be officially reported.
Various situations necessitate insurance companies to maintain provisions for IBNR claims, such as the slow development of occupational disease claims.
Delayed reporting can be observed in cases of occupational diseases like silicosis and asbestos-related illnesses, as well as defective product claims such as lead-based paint and asbestos insulation. Additionally, environmental negligence, short-term workers’ compensation injuries, and healthcare claims contribute to delayed reporting.
Understanding how insurance carriers calculate your account’s performance using IBNR is vital.
Delayed reporting affects multiple insurance coverages that require IBNR calculations, including workers’ compensation, environmental/pollution, healthcare, general liability, and product liability.
How IBNR Is Calculated
Calculating an appropriate IBNR remains a significant challenge in the insurance industry. The non-normal distribution of insurance claim variables complicates the estimation process, with inaccurate estimates potentially misrepresenting an insurer’s health. Actuaries typically rely on client-specific data to calculate IBNR, including claim amount, dates, business classifications, and policy details.
- Claim amount
- Claim number
- Claim paid dates
- Claim settlement expense
- Class of business
- Intimation date
- Loss date
- Policy from date
- Policy number
- Policy to date
- Product type
- Reinsurance paid – a share of the claim amount
- Reinsurance paid – a share of claim settlement expenses