Incurred But Not Reported (IBNR)

IBNR or Incurred But Not Reported meaning refers to a type of reserve account. This type of account is utilized in the insurance Industry. The insurance industry makes use of the given account to serve as a provision for events or claims that might have transpired, but might not have been reported yet to the insurance company.

In a situation related to IBNR, an actuary is responsible for estimating the overall potential damages. At the same time, it is the responsibility of a reliable insurance company to decide setting up reserves for the allocation of funds due to the expected losses. To the actuary, the given set of losses or events tends to incur but has not been reported.

How does Incurred But Not Reported (IBNR) Work?

IBNR or Incurred But Not Reported is known to be utilized by Insurance companies –especially those along the Gulf Coasts of regions. This is because in these regions, natural disasters including hurricanes are quite common. Upon being hit by a storm, the actuaries go forward with estimating the potential damage to the existing infrastructure. Eventually, the claims are anticipated. On the Basis of the given analysis, some amount is then put aside (in a particular reserve) to be paid in the form of claims. In this instance, the actual losses have incurred, but have not been reported officially.

There are several situations that could conspire while making it imperative for insurance companies to maintain proper funding provisions for the respective IBNR claims.

For instance, the overall impact of gradually developing some form of occupational disease is known to claim on the claims of the worker’s compensation. Such instances are known to include diseases or conditions like asbestosis, silicosis, and other types of cancers that are related to occupational exposure. Product liability or defective product claims mostly tend to feature delayed reporting –including asbestos insulation, lead-based paint, defective drywall, and others.

Improper environmental practices could also result into delayed reporting related to claims involving environmental liability. Moreover, short-term compensation of workers related to healthcare & injuries claims to a specific group of healthcare plan could experience delayed reporting. Delayed reporting is known to impact multiple types of insurance coverages requiring IBNR calculation. These are known to include liability related to environment or pollution, worker’s compensation, products, general liability, and healthcare.

How is IBNR Calculated?

The determination of the right & proper formula for the calculation of the appropriate IBNR has always served to be one of the major challenges related to the insurance industry. Insurance-specific claim variables tend to be non-normally distributed. This makes the process of estimating quite problematic. Inaccurate estimates could present an incorrect view of the health of the insurer. As such, it could result in some action being implemented that might turn out detrimental for the entire company.