Incurred But Not Reported (IBNR)

Incurred But Not Reported (IBNR) is a type of reserve account used in the insurance industry as the provision for claims and/or events that have transpired, but have not yet been reported to an insurance company. In IBNR situations, an actuary will estimate potential damages, and the insurance company may decide to set up reserves to allocate funds for the expected losses. To an actuary, these types of events and losses are said to have been incurred, but not reported.

This term is frequently used by insurance companies, particularly along the East and Gulf Coasts of the United States, where hurricanes are common. After a storm hits, actuaries estimate the potential damage to infrastructure and the claims that may be anticipated. Based on this analysis, money is then set aside (in a reserve) to pay for claims. Again, in this example, the actual losses have been incurred, but have not officially been reported.

Numerous examples exist that show the importance of IBNR calculations and funding provisions for insurance companies. Here are a few examples of such claim scenarios:

• The impact of slowly developing occupational disease claims on workers compensation claims. Such examples include silicosis, asbestosis, certain cancers determined to be related to occupational exposures
• The delayed reporting of a defective product or product liability claims, such as lead based paint, asbestos insulation and defective drywall
• Poor environmental practices that result in delayed reporting of environmental liability claims
• Delayed reporting of short-term workers compensation injuries
• Delayed reporting of healthcare claims to a group health care plan

It is very important to understand how insurance carriers use IBNR to calculate your account’s performance.

Delayed reporting impacts several types of insurance coverages, which require an IBNR calculation. These include: workers compensation, environmental/pollution, healthcare, general liability and products liability.

Determining the right and proper formula for calculating an appropriate IBNR has always been one of the toughest challenges of the insurance industry. Insurance claim variables are non-normally distributed, which makes estimating them problematic – and not getting it right is not without consequence. Inaccurate estimates can project an incorrect view of an insurer’s health and may result in action being taken that could be detrimental to the company.

At a minimum, an actuary would likely use this client data to calculate IBNR:

• 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 – share of claim amount
• Reinsurance paid – share of claim settlement expenses