Why does an IBNR matter in a renewal?

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At the end of each year, insurance companies must estimate the liability arising from the claims that have been incurred but not reported—or the IBNR.

This is to factor in the lag between the timing of the event that triggers a claim and the time the claim is reported to the insurer.

IBNR reserves are an actuarial calculation to ensure that the insurance company has adequate funds to cover claims yet to be submitted for reimbursement, says Brent Delveaux, benefits consultant, TRG Group Benefits & Pensions Inc., in Vancouver.

“They are meant to provide financial protection to clients to ensure that the insurance company has the financial ability to pay for outstanding claims,” he says. “Especially if there were issues of financial solvency for the insurance company.”

With these types of claims, the insurer doesn’t know the exact amount, nor the extent of the claim, says Claude Ferguson, director actuarial services, Medavie Blue Cross, in Montreal.

“IBNRs [reserves] are meant to make sure the insurer has the resources to pay for claims for which the amount is unknown,” he says. “[They] are set using assumptions about the future for a portion or the entire insurance portfolio using statistical models and averages based on previous overall claim experiences for the insurer.”

Most insurers have actuaries and accountants responsible for ensuring IBNRs meet acceptable actuarial and accounting standards.

IBNR & Renewals

Some insurance companies use billed premium in the calculation of their IBNRs for client renewals and others use paid claims, says Delveaux.

“Ultimately most insurance companies use premium as the basis of the calculation when determining adequate IBNR requirements for their entire block of business,” he says. “IBNRs are very important for clients to be aware of and we would always ask for IBNR factors and calculations [as they] will come into play in determining renewal adjustments.”

Insurers must keep their level of reserves well above the level required by the Office of the Superintendent of Financial Institutions, says Ferguson.

“Small businesses should make sure their insurer has IBNRs in place and at an appropriate level to ensure their employee’s claim can always be paid regardless of a spike in claims either from one company or from multiple clients,” he adds.

A common misconception is that reserves can be reduced where they appear excessive. “Reserves are average processes, and to maintain the averaging process, any reduction would have to be compensated by an increase in reserves for cases where they prove to be insufficient,” says Ferguson.

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