IBNR Claims and IBNR Reserves defined
Mysteries of the Insurance World
IBNR means “Incurred But Nor Reported” and refers to claims that have occurred but where the paperwork has not been yet performed and the insurer is still unaware of them.
As these claims still have to be paid out to victims or beneficiaries, insurers need to set aside money (“reserves”) to cover their soon-to-be-discovered costs, hence IBNR Reserves or simply IBNRs. Since the insurer knows neither how many of these losses have occurred, nor the severity of each loss, IBNR is necessarily an estimate.
The proportion of IBNR claims being fairly constant year over year, insurers have statistics to help them set aside an appropriate amount of (IBNR) reserves to meet these claims as they are reported. Another consideration is that as one waits longer, more hitherto unknown but existing claims are actually submitted and evaluated and do not need to be covered by IBNR reserves; this is one reason why reserving actuaries like to wait for a few weeks after the end of the year “for the dust to settle”, making the computation of IBNR reserves less of a critical issue.
Actuaries to compute IBNRs use methods including the chain-ladder method, the Bornhuetter-Ferguson method, the expected claims technique, and other such as stochastic claims reserving methods, the latter having become more common since the implementation of Solvency II capital requirement regulations in the European Union. The pros-and-cons of each method are matters of dispute between experts and beyond the scope of this publication, all the more as we have never seen an insurer disclosing to a corporate client the exact method used to compute its IBNRs. And, as long as the ultimate cost of claims (“ultimate losses”) is used over several years in the computation of claims reserves in the international dividend calculation, the issue becomes moot as the difference between IBNR (often determined “prudently”, i.e. unfavorably from the client’s point of view) and the actual cost of actual claims is cancelled out by the variations in claims reserves and in IBNR reserves.