Understanding Incurred But Not Reported (IBNR) in the Insurance Sector
Incurred but not reported (IBNR) refers to a reserve account within the insurance industry, set aside to cover claims and events that have occurred but have not yet been reported to the insurance company.
In such situations, an actuary estimates potential damages, and the insurance company allocates funds in anticipation of these losses. These instances are termed as incurred but not reported.
Key Points
- IBNR Reserves: These are funds used by insurers to prepare for claims that have not yet been documented.
- Reason for Delays: IBNR is often associated with reporting delays due to bureaucratic processes and administrative lags.
- Significance: Representing latent liabilities, precise estimation of IBNR reserves is essential for an insurance company to maintain accurate financial health.
The Mechanism of Incurred But Not Reported (IBNR)
IBNR is predominantly applied by insurance companies, especially in regions susceptible to natural disasters, such as the East and Gulf Coasts of the United States. When a storm occurs, actuaries assess the conceivable damage to infrastructure and project potential claims. Funds are then allocated into a reserve to manage these anticipated claims, categorically termed as IBNR.
Various scenarios necessitate IBNR reserves, such as
- Occupational Disease Claims: Gradually developing medical conditions like silicosis, asbestosis, and certain cancers.
- Product Liability Claims: Delayed reports involving defective products like lead-based paint, asbestos insulation, and defective drywall.
- Environmental Liability Claims: Arising from poor environmental practices and subsequent consequences.
- Short-Term Workers’ Compensation Injuries: Including healthcare claims under group healthcare plans that experience delayed reporting.
Accurate calculation of IBNR reserves influences an insurance carrier’s performance evaluation.
Calculating IBNR
Calculating the appropriate formula for IBNR is a significant challenge due to the non-normal distribution of insurance claim variables. Inaccurate estimations can result in misleading projections of an insurer’s financial health and could lead to adverse decisions.
Minimum required data for IBNR calculations often includes:
- Claim amount
- Claim number
- Claim paid dates
- Claim settlement expense
- Class of business
- Intimation date
- Loss date
- Policy details (from and to date, number)
- Product type
- Reinsurance contributions (claim amounts and settlement expenses)
Related Terms: actuary, insurance claims, reserves, liabilities.
