Incurred But Not Reported (IBNR)
Incurred But Not Reported (IBNR) is an actuarial reserve held by an insurance company to cover the estimated cost of losses that have already occurred but have not yet been reported to the insurer, as well as the additional development expected on claims that have been reported but whose ultimate cost is not yet fully known.
Insurance losses do not always become known to the insurer at the moment they occur. A slip-and-fall injury at a retail store may not result in a claim filing for months. An occupational disease exposure may take years to manifest as a diagnosed illness before a workers' compensation claim is submitted. A construction defect may go undetected until a building is sold or renovated many years after completion. All of these unreported losses represent a real liability on the insurer's balance sheet even though no claim has been filed, and IBNR reserves are the mechanism for estimating and provisioning for that liability.
Actuaries further divide IBNR into two components. Pure IBNR — sometimes called IBNR proper — covers losses that have occurred but for which no report has yet been received. Incurred But Not Enough Reserved (IBNER), sometimes called development on known claims or case reserve development, covers the additional liability expected on claims already reported but for which case reserves set by claims adjusters are likely to prove inadequate as the claim matures.
The combined IBNR reserve — pure IBNR plus IBNER — is estimated using actuarial methods applied to loss development triangles. The Bornhuetter-Ferguson method is widely used for immature accident years where there is limited development data, blending expected losses based on premium and a priori loss ratios with actual reported development. The chain-ladder method is used for more mature years where historical development patterns are reliable.
For long-tail liability lines — medical malpractice, general liability, directors and officers liability, environmental liability — IBNR reserves can exceed reported (case) reserves by multiples, because the tail of unreported and under-developed claims is very long. For short-tail lines like property, IBNR is typically a smaller fraction of total reserves.
From an investor's perspective, IBNR is the most uncertain component of an insurer's loss reserves and the most susceptible to manipulation, whether deliberate or through optimistic actuarial assumptions. Inadequate IBNR is the most common source of adverse reserve development, and significant adverse development can erode book value, impair credit ratings, and in severe cases threaten solvency. Analysts compare IBNR as a percentage of total reserves and of net earned premium across peer companies and over time to assess reserve conservatism.