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Incurred But Not Reported (IBNR) Definition
Incurred but not reported refers to a reserve account type which is used the insurance sector to document claims and and events that have transpired on a client, but has not been reported to the insurance firm. In IBNR cases, an actuary will calculate and approximate the cost for potential or possible damages, and the insurance firm would decide whether to enact reserves to cover up for the losses. To the actuary, such claims are said to have happened, but they’ve not being reported to the appropriate bodies.
A Little More on What is Insured But Not Reported (IBNR)
IBNR are used by insurance firms, mostly those ones located in the Gulf Coast and the East Coasts of the U.S. where there are higher chances of hurricanes. After a hurricane or a storm hits, an actuary would estimate the potential or possible damage or destructions that were incurred by their clients and also claims that may be looked into. In such a situation, the client has incurred the actual losses which makes him or her eligible for an insurance repair, but has not officially reported the losses.
IBNR Claims: Possible Situations
There are different examples which exist and highlight the importance of IBNR calculations and funding provisions for insurance companies. Here are some situations that make invite IBNR claims:
- The effect of slowly developing occupational diseases claims on workers compensation claims. Examples include: silicosis, cancer derived from occupational chores (like skin cancer, lung cancers), asbestosis.
- Delayed reporting of defective goods or goods liability claims like lead paints, asbestos insulation and defective drywall.
- Delayed reporting of short-term employees injuries
- Delayed reporting of healthcare claims to a health care plan
- Poor environmental actions which can result in environmental liability claims
Understanding how insurance firms make use of IBNR to calculate your account’s performance is very important to any owner or client.
Also, delayed reporting impacts several types of insurance coverages which require an IBNR measurement. Such insurance coverages include: employees compensation, environmental and pollution coverage, healthcare, general liability and product liability.
Calculating Incurred But Not Reported (IBNR)
Deciding the right formula for measuring IBNR is one of the hardest things that an actuary has to do in the insurance industry. There are many factors which come into play in calculating IBNR, and any mistake does have its own consequence. Inaccurate estimates can provide poor view of the insurer’s health and this might lead to detrimental legal actions against the firm. An actuary most likely will make use of all of these informations from a client to calculate IBNR:
- The claim amount
- Claim number
- Claim settlement cost
- Claim paid dates
- Date of loss
- Intimidation date
- Policy from the date
- Policy number
- Type of product
- Reinsurance paid (the share of claim settlement expenses)
- Policy to date
- Reinsurance paid (share of the claim amount).
References for “Incurred But Not Reported (IBNR)”
Academic Research on IBNR – Incurred but not reported
An empirical analysis of the magnitude and accuracy of incurred–but–not–reported reserves, Aiuppa, T. A., & Trieschmann, J. S. (1987). Journal of Risk and Insurance, 100-118. This paper investigates the Incurred-But-Not-Reported (IBNR) components of the reserves established by Property/Liability insurance companies for five liability lines.
IBNR-claims and the two-way model of ANOVA, Kremer, E. (1982). Scandinavian Actuarial Journal, 1982(1), 47-55. In this paper, a method for estimating the expected value of IBNR-c1aims is derived by transforming the classical multiplicative model into a two-way model of Analysis of Variance, in which easy tractable results of Mathematical Statistics can be applied. The resulting method is shown to be strongly connected to the classical chain ladder method.
Prediction of RBNS and IBNR claims using claim amounts and claim counts, Verrall, R., Nielsen, J. P., & Jessen, A. H. (2010). ASTIN Bulletin: The Journal of the IAA, 40(2), 871-887. In this article, a model is proposed using the run-off triangle of paid claims and also the numbers of reported claims (in a similar triangular array). The model explicitly takes into account the delay from when a claim is incurred and to when it is reported (the IBNR delay) and the delay from when a claim is reported and to when it is fully paid (the RBNS delay). The results are compared with those of the chain ladder technique.
A statistical approach to IBNR-reserves in marine reinsurance, Hertig, J. (1985). ASTIN Bulletin: The Journal of the IAA, 15(2), 171-183. This paper evaluates the security loading of IBNR-reserves at portfolio level.
A multivariate analysis of loss reserving estimates in property-liability insurers, Weiss, M. (1985). Journal of Risk and Insurance, 199-221. This article tests the hypotheses that exogenous economic developments and smoothing activity significantly affect loss reserving errors in the automobile liability insurance line. A sample of sixteen large automobile liability insurers is analyzed using pooled, cross-section time series regression for the period 1955-1975.
Prediction of IBNR claim counts by modelling the distribution of report lags, Kaminsky, K. S. (1987). Insurance: Mathematics and Economics, 6(2), 151-159. This paper explains the concept of IBNR claims. In this paper, the authors discuss some methods of predicting the number of IBNR claims.
A non-parametric method for incurred but not reported claim reserve estimation, Lopes, H., Barcellos, J., Kubrusly, J., & Fernandes, C. (2012). International Journal for Uncertainty Quantification, 2(1). This work introduces new non-parametric models to IBNR estimation based on kernel methods; namely, support vector regression and Gaussian process regression. The proposed models are then compared to Mack′s model using real data examples. This paper aims to show that the proposed model are more competitive than the Mack’s model.
Applying copula models to individual claim loss reserving methods, Zhao, X., & Zhou, X. (2010). Insurance: Mathematics and Economics, 46(2), 290-299. The estimation of loss reserves for incurred but not reported (IBNR) claims presents an important task for insurance companies to predict their liabilities. In this article, the authors propose to use semi-competing risks copula and semi-survival copula models to fit the dependence structure of the event times with delays in the individual claim loss model.