This article examines the various components of IBNR for self-insured organizations.
A self-insured’s individual claim reserves typically compose a significant, but not complete portion of its overall loss reserve liability. Rarely are case reserves sufficient to fund all expected future payments. Therefore, an additional reserve component is necessary to recognize expected future payments not considered in the case reserves. This additional component, called IBNR, is calculated for a portfolio of claims. In other words, it is not calculated on an individual claim basis, but rather, in aggregate.
IBNR is short for “Incurred but Not Reported” and is sometimes referred to as “unreported loss”. It is inherently composed of the following key elements, though they are usually not individually quantified:
- Case reserve development
- Late reported claims
- Reopened claims
- Pipeline claims
Depending on the context, the term IBNR may be used to include claim related expenses such as ALAE and ULAE. This article will focus on the general characteristics of IBNR. More information on expense-specific versions of IBNR (ALAE IBNR and ULAE IBNR) can be found here.
The components of IBNR are examined in more detail below.
Case Reserve Development
Adverse case reserve development is usually the largest component of IBNR. Despite claims administrators’ best efforts to estimate future claim payments, on average, case reserves tend to be inadequate. Below are several common causes of adverse (upward) development of case reserves.
- Insufficient or inaccurate claim information – Determination of insured liability is rarely straightforward. The amount and quality of available information will affect the claims administrator’s ability to accurately determine future expected payments.
- Newly reported claims – Generally, little information is known about claims that have been recently reported. It may take several months for claims administrators to gather and process enough information in order to establish and record a case reserve. Most claims administrators will establish a relatively small case reserve as a “placeholder” on newly reported claims before the initial claims review is complete.
- Claims inflation – Case reserves rarely consider future claims inflation. This is particularly relevant in workers compensation wherein medical inflation can be significant and sustained for many years over the course of a claimant’s treatment.
- Changes in medical condition – for workers compensation, a significant source of adverse case reserve development stems from adverse changes in the injured worker’s medical condition. A claims adjuster cannot reasonably be expected to anticipate such changes.
- Optimism – case reserves may be set too low due to the intentional or unintentional influence of optimistic expectations set by legal counsel or company management.
Late Reported Claims
Late reported claims describe accidents that 1) occurred on or prior to the accounting date1 and 2) have not been reported on or prior to the accounting date. These claims are sometimes called “pure IBNR” since they allow for a more literal interpretation of expression “incurred but not reported”.
The status of a claim as either “open” or “closed” is subject to the judgment of claims administrators and the influence of claims management policies. A claim with a “closed” status will generally have no case reserves as no future payments are expected. A reopened claim is a previously “closed” claim that is once again opened (and case reserved) to provide for the possibility of future payments. This component generally represents a small portion of IBNR.
Pipeline claims are also called “reported but not recorded” claims. As the latter name suggests, these claims relate to accidents have been reported to the organization, but have not yet been formally recorded as claims. This class of claims exists simply due to processing or timing lag and generally represent a small portion of IBNR.
Disclaimer: Information presented in this article should not be relied upon as actuarial or accounting advice, which should be provided by a credentialed actuary or accountant familiar with the details of your organization’s risk management program.
1. “Accounting date” refers to the evaluation date of the reserve analysis. For example, the accounting date would be December 31, 2018 for a year-end 2018 financial statement.