Incurred but not reported (IBNR)

IBNR is a term that is commonly used in regard to insurance/reinsurance.

IBNR reflects the total amount owed by the insurer to all valid claimants who have had a covered
loss but have not yet reported it. Since the insurer knows neither how many of these losses (the frequency)
have occurred, nor the severity of each loss, IBNR is necessarily an estimate. The quality of this estimation
is often used as a tool in assessing the financial accounting skills of a given insurer. Insurers track IBNR by policy
periods (when the policy incepted), along with other categorizations. The characteristics of IBNR makes it look
more like a reserve or provision for the particular types of losses not reported, hence gives a better estimation of
profits for the insurer's current business period.

When a policy of insurance is written it will typically cover a defined (often 12 month) period from
inception of the policy. When the policy is sold, a premium is paid by the insured party to the insurer. The number
and cost of claims that will arise from the policy are unknown and unknowable amounts at inception. Indeed, at
expiry of the policy there can be a high degree of uncertainty as to what the cost of claims will ultimately be.
There might be some information available on incurred claims amounts but this can often be zero.

The insurer will conduct a reserving exercise with a view to assessing what this ultimate cost will be. This
enables them to assess the profitability of the business that they have written and are planning to write in the
future.

There is an exceptionally low degree of agreement within general insurance as to what much of the
terminology actually means. IBNR is a widely accepted term with a fairly standard meaning.

This balancing item between the incurred claims and the ultimate claims is commonly referred to as the
IBNR or the IBNR reserve. In pure terms, it only allows for those claims that have occurred before the valuation
date but have not yet been reported to the insurer either directly or through the broker, hence the name. This pure
usage is not used in practice. The more common usage includes reserves for items such as reopened claims, future
claims on exposures to be written within the projection period, salvage and subrogation.

The calculation of the IBNR reserve is a process that requires judgement and the results of which will
remain uncertain for several years. The reserving process is typically done at an aggregate level. For
example, at a class of business, underwriting year and currency level. It is important to try to achieve a
homogeneous data grouping and to treat any special claims separately. For example, US Banks business written
in 2001 needs to have any claims relating to the collapse of the Enron Corporation treated separately. Similarly,
US Property Excess of Loss business written in 2004 and 2005 needs to have any claims relating to Hurricanes
treated separately.

Such reserving calculations should be performed at a gross of reinsurance level and also for outwards
proportional reinsurance and outwards excess of loss reinsurance separately.

Reserving is undertaken by actuaries who are professionally qualified people.

The above description is appropriate for most of the world and reflects the practices in the London Market,
although practices can differ.