“What is IBNR?” is a commonly asked question…
Especially at a Board of Directors Meeting
Written by Grover M. Edie, MBA, FCAS, MAAA, CERA, CPCU, ARM, ARP
Like in most industries, insurance companies are required to hold liabilities on their books. For insurers, those liabilities include unpaid costs of claims. Some claims are reported and paid quickly, some are reported quickly but take time to pay, and yet others have delayed reporting. Statutory accounting requires the insurer reflect the amount the insurer expects to pay for all unpaid claims. Insurers reflect on their books Incurred But Not Reported (IBNR) reserves that include the expected future payments on the reported but not yet paid claims as well as amounts for those claims that have occurred but are not yet reported as of the accounting date.
This occurs when the ultimate value of the claim and claims reserve cannot be precisely determined in advance. The provisions for them on any balance sheet date is usually estimated. They can also be tested using actuarial and statistical techniques.
Usually, most of the claims reserve is in the form of estimates from a claims adjuster. The total of all the claim adjusters’ reserves is referred to as the case reserve. However, not all of the information regarding each claim has been presented to the claim adjusters by the accounting date. Therefore an estimate of the value of such costs of “unknown” information is necessary on claims being adjusted. Some call it Incurred But Not Enough (Information) Reported, or IBNER, to represent the cost of additional unknown information on reported claims.
For known outstanding claims, the IBNER can be calculated as the difference between the current case reserve and the estimated amount needed to settle the reported claims. This exists as a provision for future development on known claims. It will include payments post closure for reopened claims.
As of an accounting date, not all the claims may have been presented to the insurance company. These “unknown” claims are still costs, and need to be reflected on the balance sheet. Some actuaries call this Incurred But Not Yet Reported claim costs, or IBNYR. For unreported claims, the IBNYR is sometimes separately calculated. Often, the IBNER and IBNYR amounts are calculated together, and are referred to on a combined basis as IBNR, or Incurred But Not Reported.
As a group of claims age, additional information becomes known. This is reflected when more claims are settled and paid, and previously unreported claims are reported. Thus, the IBNR component of total balance sheet reserves diminishes. The result is the amount of IBNR for a given accident year generally decreases over time. A decline in IBNR for mature accident years is typically offset by the IBNR needed for the newest accident year. Never-the-less, overall IBNR can still increase over time.
Please contact your Huggins actuary for more information, or contact the author.
Grover M. Edie, MBA, FCAS, MAAA, CPCU, ARP, CERA, ARM