Incurred But Not Reported Claims (IBNR)

Incurred but not reported (IBNR) claims are losses that have taken place under insurance policies but that the insurer has not yet been told about. Since the insured event has already happened, the insurer owes the money, even though no claim file exists. The insurer therefore holds an IBNR reserve: an estimate, made by actuaries, of what those unknown claims will eventually cost. It is usually the most uncertain part of an insurer's liabilities.

The IBNR reserve sits beside case reserves, which are the amounts set by claims handlers for claims that have been reported but not yet paid. Together they make up the claims reserve for outstanding losses. In practice the term is often used broadly to include a further allowance for reported claims whose case reserves will prove too low, sometimes labelled incurred but not enough reported. Estimating both is the central task of claims reserving.

The delay between an event and its notification varies by type of insurance. In property and motor damage business, known as short-tail, most claims are reported within days or weeks, and IBNR is small relative to premiums. In liability business, known as long-tail, the delay can be years. An injury caused by a defective product, a professional error, or exposure to a harmful substance at work may not become apparent for a long time; claims for asbestos-related disease were made decades after the policies were written. Reinsurers face longer delays still, because they learn of losses only after the insurer they cover has processed them.

Delays also arise from ordinary causes: a policyholder is slow to notify, a claim passes through a broker, or a large event such as a storm produces more claims than can be registered quickly.

Because the claims are unknown, they cannot be assessed one by one. Actuaries infer them from the pattern of past claims, arranged by the period in which losses occurred and the time elapsed since, a layout described under claims triangulation. The main methods are as follows.

• Chain ladder. Past development is used to calculate a loss development factor for each stage, and the factors are applied to recent periods to project their ultimate cost. The method assumes that the future will develop as the past did.
• Expected loss ratio. Ultimate claims are estimated as premiums multiplied by an assumed loss ratio. It is used where there is little or no claims history, as for a new line of business.
• Bornhuetter-Ferguson. This blends the two: reported claims are taken as they stand, and the unreported portion is estimated from the expected loss ratio. It is more stable than the chain ladder for recent, immature periods.
• Frequency and severity methods. The number of late claims and their average cost are projected separately.

IBNR is the projected ultimate cost less the claims already paid and the case reserves held. Actuaries normally apply several methods, compare the results and select a figure using judgement. The cost of settling the claims, known as loss adjustment expense, is reserved alongside.

An increase in IBNR reduces profit in the period it is recognised, and a release increases it, so the reserve directly affects reported results and the combined ratio. Under IFRS 17, unreported claims form part of the liability for incurred claims, measured as a discounted, probability-weighted estimate with an explicit risk adjustment. Under Solvency II in Europe they are part of the best estimate claims provision within technical provisions. In the United States, statutory accounting generally requires undiscounted reserves, and each insurer must obtain an annual opinion on its reserves from an appointed actuary.

Supervisors and auditors pay close attention to IBNR, since under-reserving flatters current profit and capital and has been a common factor in insurer failures. Tax authorities watch for the opposite, as over-reserving defers taxable profit.

Estimates fail when the past ceases to be a guide. Changes in claims handling speed, in case reserving practice, in policy terms or in the mix of business distort development patterns. Inflation in claims costs, including the effect of court awards and legal trends, raises the cost of claims still to be settled. Entirely new types of claim, or a catastrophe, are not reflected in history at all. Insurers therefore monitor actual against expected development each quarter and revise the reserve; persistent increases for old years, called adverse development, signal that earlier estimates were too low.

The concept applies wherever an organisation bears claims that emerge late. Employers and health plans that self-insure medical benefits hold IBNR for treatment already received but not yet billed. Captive insurers, pension schemes paying death benefits and warranty providers do the same. In a reinsurance treaty, the ceding insurer reports its IBNR to the reinsurer, which adds its own estimate. When books of old liabilities are sold or transferred, the adequacy of IBNR is usually the main issue in pricing, and it determines how much policyholder surplus remains to support new business. Day-to-day handling of reported claims is described under claims administration.