Claims Reserving Manual, vol.1: Section I: Methods for IBNR

Document description

IBNR means "Incurred but not reported". The term refers to claims not yet known to the insurer, but for which a liability is believed to exist at the reserving date. That is simple enough in itself, but the four letters contain a wealth of meaning, and of ambiguity. The wealth arises from the fact that IBNR acts as the remainder term in General Insurance reserving. Many things which cannot be dealt with explicitly elsewhere can be left to fall into the IBNR bag — and as a result, one sometimes cannot be sure what it contains, or even is supposed to contain.

Apart from this, there is the slight mystery of how to go about reserving for claims which have not yet come in, and are still in some sense a figment of the future. The only certainty is that such claims will come in, and that there is a duty to make provision for them. Of course, there are ways of dealing with the problem, and fortunately many of these can be described through a single basic principle. It is largely a question of finding a surrogate measure which will stand in place of the IBNR, of substituting the known for the unknown, and justifying one's case for so doing.

An important concept is that of the IBNR run-off. Although IBNR claims are at first unknown, at some time in the future they must become manifest. At this stage, values can be recorded for them — payments, numbers, case reserves, and incurred amounts, just as for any other group of claims. Hence data can be built up on their development patterns, and the data used in projections. A few of the methods are described here, but in the end the reserver need only be limited by his or her own ingenuity. There are some pitfalls to be avoided, however, particularly when it comes to combining IBNR estimates with those for reported claims. It is very possible to double count certain of the elements, or to leave out others completely.

Contents: IBNR - definition and ambiguities; IBNR as the remainder term; IBNR estimates - the underlying principle; Alternative bases for IBNR projection; Tarbell's method and IBNR run-off; Average cost per IBNR claim; IBNR by accident year projection; Adjusted projection using accident and report yea