An underwriter once emailed me declaring that the IB and R load was too high on a particular account. I never had the heart to ask him what the letters I, B, or R signified in that statement, but obviously that must be what IBNR sounds like when pronounced too fast or with an accent.

Anyone involved in risk management or property and casualty insurance very long will hear the term IBNR used by actuaries, underwriters, brokers, accountants, and risk managers. IBNR impacts estimated required reserves, collateral calculations, and loss projections. What exactly do actuaries and other risk management professionals mean when they refer to IBNR?

The acronym IBNR stands for Incurred But Not Reported. When IBNR is mentioned, more often than not it refers to Estimated Incurred But Not Reported Loss Reserves or Estimated Incurred But Not Reported Loss and Allocated Loss Adjustment Expense (ALAE) Reserves.

IBNR can be thought of as composed of two parts:

1) Pure IBNR Reserve – reserve for claims that have been incurred but have not reported yet.

2) Reserve for Development on Known Claims – reserve for the additional development on claims that have reported.

Taken literally the term IBNR would seem to represent only #1 above, the Pure IBNR Reserves. However, when actuaries and other risk management professionals use the term IBNR, they typically mean the combined total of #1 and #2 above.

Actuaries typically calculate the total IBNR provision on a combined basis. The exception is for coverages written on a claims-made basis where separate estimates of the two parts are more the rule. The Pure IBNR reserves are sometimes referred to as the tail liability in those cases.

Part 1 of IBNR: Pure IBNR Reserve
Stated in another way, Pure IBNR is the provision for claims that have happened but have not reported yet. History has shown that there can be a significant time lag between when a claim occurs and when the claim reports to the company. The Pure IBNR Reserve represents the estimated amount needed to cover those unreported claims that have already happened.

For coverages such as medical professional liability and products liability, the Pure IBNR Reserve represents a significant portion of the overall IBNR amount. Historically, a large percentage of claims have reported late for medical professional liability and products liability. Workers compensation and general liability IBNR reserves also routinely include implicit provisions related to late reported claims.

Part 2 of IBNR: Reserve for Development on Known Claims
The second part of IBNR is the estimated additional amount needed to ultimately settle the known claims above the current incurred value for those known claims. (Note the incurred value is defined as the paid amount plus the case reserves on the claims). In an overwhelming majority of cases, history has shown that the value of the known claims, in aggregate, increase over time. It is just part of the “life cycle” of a claim as it is settled.

The fact that claim values increase over the life of a claim does not imply any deficiency on the part of the claim adjuster or claim handler. The details of the claim emerge over time. For long-tailed coverages such as workers compensation and general liability, even claims at very mature stages of development (e.g. over 10 years old) have historically shown additional incurred development.

There are exceptions where the Reserve for Development on Known Claims is negative. In those instances, the case reserves are more often than not set at very conservative levels. When the case reserves have been set at ultra-conservative levels, the incurred values may develop downward over time. Again, this is more the exception than the rule, but it is possible.

Total Estimated Required Reserves
The estimated required reserves in total are defined as the case reserves plus IBNR. When the estimated required reserves are booked as a liability on the balance sheet, sometimes they are shown simply as one line item such as loss reserves. Other times the estimated required reserves are shown as two separate parts – case reserves and IBNR. In instances where they are shown as two separate parts, the case reserves represent the amounts tying to the claim reserves shown on the loss runs from the carriers or third party administrators. The IBNR reflects both parts as described above.

Additional Resources
For information on the calculations related to IBNR, Chapter 3 of our booklet An Actuarial Advantage: Maximizing the Benefit of an Actuarial Analysis is a great place to start.

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