Incurred But Not Reported (IBNR)

What is IBNR?

Incurred But Not Reported (IBNR) refers to reserves that insurance companies set aside to cover claims for events that have already occurred but have not yet been reported. Actuaries estimate these latent liabilities so insurers have funds available when the claims are eventually filed.

Why IBNR matters

IBNR reserves affect an insurer’s financial statements, solvency assessment, pricing, and risk management. Underestimating IBNR can understate future obligations and misrepresent financial health; overestimating ties up capital unnecessarily. Accurate IBNR estimation is therefore essential for regulators, management, policyholders, and investors.

Common situations that create IBNR

Delays between loss occurrence and claim reporting can arise from:
* Natural disasters (e.g., hurricanes): widespread damage may take time to surface and be reported.
* Slowly developing occupational diseases (e.g., asbestosis, silicosis) and certain workplace-related cancers.
* Defective-product or latent-exposure claims (e.g., lead paint, asbestos).
* Environmental pollution claims where discovery and notification are delayed.
* Short-term workers’ compensation and group healthcare claims that are reported after administrative lags.

How actuaries estimate IBNR

Estimating IBNR typically involves statistical and actuarial methods that model claim emergence patterns and severity. Because claim amounts and timings are often skewed and non-normal, actuaries use historical data, chain-ladder methods, loss development factors, and other techniques to project ultimate losses and the portion still unreported.

Common data elements used in IBNR calculations:
* Claim identifier and class of business
* Loss date and intimation/report date
* Policy number, effective and expiry dates
* Claim amounts (paid and reserved) and settlement expenses
* Claim payment dates
* Reinsurance recoveries (paid and payable)
* Product/type of coverage

Challenges and risks

• Non-normal distributions and heavy tails make projections volatile.
• Changes in legal, medical, or reporting practices can shift development patterns.
• Catastrophic events or emerging liabilities (new contaminants, novel medical findings) can invalidate historical assumptions.
• Inaccurate IBNR can lead to poor business decisions, misstated financials, and regulatory issues.

Key takeaways

• IBNR reserves protect insurers against claims that have occurred but are not yet reported.
• Accurate IBNR estimation is critical to reflect true liabilities and maintain financial stability.
• Actuaries rely on detailed claims and policy data and use established actuarial methods, but estimates remain uncertain due to data skewness and changing claim patterns.
• Stakeholders should consider IBNR assumptions when assessing an insurer’s performance and solvency.

Bottom line

IBNR is a fundamental component of insurance reserving. Proper estimation balances prudence and capital efficiency and is vital for transparent financial reporting and effective risk management.