IBNR

Suppose it is New Year's Eve and you are closing the books for the year. Somewhere out there, a delivery van slid on ice this afternoon and damaged someone's parked car — but the owner has not called you yet, and will not for another week. The accident is already in your year; the bill is already coming; you just do not know about it yet. The money you must set aside for all such accidents — already happened, not yet reported to you — is the IBNR reserve. IBNR stands for 'incurred but not reported.'

Precisely, IBNR is the estimated cost of claims for events that occurred on or before the valuation date but have not been reported to the insurer by that date. Because there is no file, no claimant, and no case reserve for these claims, the actuary cannot count them one by one; instead the amount is inferred from history — how many claims from past years arrived late, and how big they were. For instance, if past data show that a given accident year is only about 70 percent reported by the end of its first year, and you have already booked 7 million of reported losses, you would expect ultimate losses near 10 million and hold about 3 million of IBNR for the not-yet-reported remainder. (In broad usage, 'IBNR' is sometimes stretched to also include the expected future development on already-reported claims, but strictly that piece is IBNER.)

IBNR matters enormously on long-tail lines such as liability, where claims can surface years after the accident — think a workplace illness diagnosed a decade later. On those lines IBNR can dwarf the case reserves, so getting it wrong quietly distorts profit and capital for years. A key honesty point: IBNR is the most uncertain part of the reserve precisely because it concerns claims nobody has seen, so it depends heavily on the assumption that the past reporting pattern still holds — an assumption that breaks during legal, social, or economic change.