Incurred But Not Reported (IBNR) refers to the reserves that insurance companies set aside for claims that have occurred but have not yet been reported by policyholders. This concept is crucial in the insurance industry for ensuring that companies have sufficient reserves to cover all potential liabilities.
Definition
IBNR reserves are an estimated amount of money set aside by insurers to account for:
- Claims Incurred: Events that have happened within the coverage period.
- Not Yet Reported: These claims have not been notified to the insurer.
Importance of IBNR in Insurance
Financial Stability
Accurately estimating IBNR reserves is critical for an insurance company’s financial stability, ensuring that it maintains sufficient funds to cover all potential claims.
Regulatory Compliance
Insurers are required to report their reserve levels and maintain adequate reserves in compliance with regulatory requirements to ensure solvency.
Calculation of IBNR Reserves
The calculation of IBNR reserves can be complex and generally involves actuarial methods.
Common Methods
1. Chain-Ladder Method
This method uses historical claim data to project future claims, assuming that past patterns will continue.
2. Bornhuetter-Ferguson Method
This method combines historical loss data with prior estimates of ultimate losses to calculate IBNR.
Example Calculation
- Historical Claims Data: An insurer reviews claims from the past five years.
- Percentage of Ultimate Claims Reported: They determine 70% of claims are typically reported within the first year.
- Estimate IBNR: The remaining 30% are the IBNR reserves calculated based on known losses.
Special Considerations in IBNR
Delayed Reporting
The nature of claims that are reported late, such as medical malpractice or liability claims, can affect the estimation.
Changes in Risk Profile
Changes in the types of risks insured or business operations can significantly impact IBNR estimates.
Applicability
IBNR is widely applicable in various types of insurance, including property and casualty, health, and life insurance. It ensures the insurer’s ability to settle claims fairly and promptly.
Historical Context of IBNR
The concept of IBNR emerged as insurance became more data-driven, leveraging statistical methods to improve financial health and regulatory compliance of insurance companies.
Comparisons and Related Terms
Case Reserves
Established for specific, reported claims. In contrast, IBNR reserves cover unreported claims.
Loss Reserves
The total reserves for both reported and unreported claims.
FAQs
What happens if IBNR is underestimated?
Can IBNR reserves be adjusted?
Who is responsible for calculating IBNR?
References
- “Fundamentals of General Insurance Actuarial Analysis” by Jacqueline Friedland
- National Association of Insurance Commissioners (NAIC) guidelines
Summary
Incurred But Not Reported (IBNR) reserves are vital for the insurance industry’s ability to remain solvent and meet policyholder claims. The calculation of these reserves involves actuarial science and is influenced by historical data, reporting delays, and changes in business operations. Proper estimation and management of IBNR are crucial for regulatory compliance and financial stability.
