Incurred But Not Reported or IBNR reserves are a part of claims reserves estimated by insurers for reporting on their financial statements. Claims reserves are estimates of claims that have occurred on or before the financial statement report date but which have yet to be paid. This a current liability that has to be reported regularly on the insurer’s financial statements even though the actual final settlement cost of the claims may be unknown to the entity at that date. Accuracy of these claims reserves estimates is important to the insurer for a number of reasons. It impacts the insurers:
- Profitability, financial position, and strength which influences how investors and regulators view
- Pricing, underwriting, strategic and financial decisions made by its management
Inaccurate estimates will project an incorrect view of the insurer’s health and may result in investors and regulators taking actions that may be detrimental to the company. The insurer’s own management may take incorrect and possibly adverse action to correct perceived failings or benefit from perceived wellness that erroneous estimates convey.
Claims reserves comprise of two main portions:
- Outstanding case reserves for claims incurred and reported as of the financial report date
- Incurred but not reported (IBNR) claims reserve estimate, as mentioned above, which consists of:
- A pure IBNR reserve estimate, that is claims that have incurred but which has not yet been reported to the insurer
- Provision for future development of claims already reported to the insurer
- Provision for claims that will be reopened in the future
- Provision for claims that have been reported but which are not yet recorded in the insurers books
Outstanding case reserves are determined by insurer’s claims department or an independent claims adjuster hired by the insurer while the Incurred But Not Reported or IBNR reserves estimate is usually determined / advised by an actuary. The focus of this post is on the latter estimate.
A non-life insurer is required to hold a liability for the unexpired risk that is valued at not less than the sum of unearned premium reserve and the premium deficiency reserve, where the:
- Unearned premium reserve (UPR) is the unexpired portion of the premium which relates to business in force at the balance sheet date; and
- Premium deficiency reserve (PDR) is the amount if any by which the expected settlement cost, including settlement expenses but after deduction of expected reinsurance recoveries, of claims expected to be incurred after the balance sheet date in respect of policies in force at the balance sheet date, exceeds the unearned premium reserve.
We will soon cover the process for all the Methods of Reserving using Run off triangle and stochastic modelling with description on each of them.
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