Incurred But Not Reported (IBNR): A 60-Second Seminar in Workers’ Compensation Claims Handling

In the process of estimating the final cost of claims under a policy of workers’ compensation insurance, insurers and claim administrators typically add a charge for what is known as “IBNR,” which stands for “incurred but not reported.” For the most part this acronym is foreign to a claims department; however, it has exceptional meaning to insurance underwriters. Sadly, far too often claims personnel are unfamiliar with underwriting terminology (just as underwriters are unfamiliar with claims handling procedures). Although both occupations are involved in the business of workers’ compensation insurance, their roles seldom overlap. For that reason, today’s blog explains the importance of IBNR to employers and claims representatives alike.

IBNR deals with claims not yet reported under a policy as of its expiration date, and reflects the fact that claims are sometimes reported late due to a variety of reasons, including cumulative trauma unawareness, latent injuries, employer neglect, employee revenge and for co-defendant contribution purposes. An IBNR uses an actuarial formula to project the cost for these unreported claims.
The easiest way to explain an IBNR is to look at an entire policy year. If for example the current incurred reserve for that policy year is $1 million then ask, “What will the total incurred reserve be after all claims for that policy year are reported and closed?” Should the sum exceed the current incurred reserve of $1M, the difference represents the IBNR.

An IBNR also assists in predicting the ultimate value of an employer’s liability in a given policy year. It is useful for self-insured employers as well to establish financial projections and to assess the success or failure of safety programs.

Another term often referenced in workers’ compensation is the phrase “loss ratio,” which is calculated by taking the incurred reserves under a policy divided by the premium. For example: If the total incurred reserve is $750,000 where the policy premium is $1 million, then the loss ratio is 75%, which is generally regarded to be an excellent loss ratio for most employers. However, when IBNR figures are added to the incurred reserves will increase. For example, if a policy with incurred reserves of $750,000 (75% loss ratio), is subject to an IBNR of 50%, the total incurred reserve will increase to $1,125,000M, resulting in a loss ratio of 112.5%, which is an undesirable result. Loss ratios that do not consider IBNR figures are unreliable and should not be used for financial projections. Otherwise, what appears to be a successful workers’ compensation program may be nothing short of a disaster.

For this reason, we urge our friends and clients not to rely on a loss ratio alone. An IBNR must be included in the loss ratio calculation to obtain more accurate results. Note that the percentile of IBNR used by an insurer can be negotiated between insurer and insured! If you any questions about IBNR, loss ratios, or claims reserving, do not hesitate to contact the attorneys at F+B for guidance.