Incurred But Not Reported (IBNR): A Simple Guide
What is IBNR?
Imagine you’re playing with your friends and one of them, let’s call him John, falls and gets hurt, but no one tells the teacher right away. Later, when you finally tell the teacher, she realizes that John’s fall is just the beginning of the story. Maybe he also hurt his arm, and you didn’t notice before.
In the world of insurance, this is like “Incurred But Not Reported” (IBNR). It means there are accidents or problems that happened but haven’t been officially reported yet.
Why is IBNR Important?
Think of IBNR as surprises. Insurance companies don’t like surprises because if they’re not prepared, they may not have enough money saved to pay for the surprises.
How Does IBNR Affect Insurance Premiums?
Let’s pretend insurance is like a piggy bank where you save money for any surprises, like accidentally breaking a toy. The more surprises you expect, the more money you need to save.
Insurance companies do the same thing. They try to guess how many surprises (IBNR claims) might happen and add that to the amount they think you need to pay (your premium). This way, they make sure they have enough money to cover all possible surprises.
How IBNR Works in Real Life
Let’s use John again. He slipped and hurt his knee. If John doesn’t tell the teacher right away, that’s one IBNR claim.
Later, if his knee gets worse and he needs more help, that is another IBNR surprise from the original accident. Insurance companies need to keep track of these surprises to make sure they can help whenever something goes wrong.
Traditional Insurance vs. Captive Insurance
With traditional insurance, you pay a fee, and the insurance company takes care of the surprises. If they guessed the number of surprises right, they keep the extra money. If they guessed wrong, they might lose money.
With captive insurance, your company owns and controls the insurance program. Therefore, if there are fewer surprises than expected, your company keeps the extra money, making your business more profitable.
Conclusion
IBNR is like the hidden surprises in the world of insurance. It helps companies save enough money to cover unexpected problems. Understanding IBNR can help you see why your insurance premiums are set the way they are and how you can better manage your total risk.
