Ask Joey ™ a Question

What is IBNR?

IBNR is an acronym for “incurred but not reported” insurance claims. You’ll typically see an IBNR reserve for companies in the insurance industry. The reserve is a provision for insurance claims that their customers have incurred but not yet reported to the insurance company (similar to knowing you have to pay an invoice, but you haven’t actually received an invoice yet).

For example, if there was a tornado in the great state of Boobaloo, then certain people may have their farms destroyed! Farmer Bill has his farm destroyed, but he hasn’t yet reported it to the insurance company. After a major event like a tornado, it could takes weeks or months for all impacted parties to report the event to their insurance provider. Farmer Bill’s claim should generally be included in the IBNR estimate that the insurance company would calculate.

For accounting and finance, purposes you should understand that total insurance liability equals reported losses, plus IBNR losses (i.e. those not yet reported. So if the insurance company had reported losses/claims of $5,000, and they estimated another $3,000 of claims that had been incurred but not reported (“IBNR”), then total insurances losses for the insurance company should total $8,000 in their financial statements.

You might also be interested in...

  • What is the relationship between volume and variable cost per unit?

    If the variable cost per unit remains fixed, then any increase or decrease in unit volume will result in an increase or decrease in total variable costs for a business. For example, if variable cost per unit was steady at $5, then if unit volume were to increase from 100 to 200 units, then total […]

  • How can variable sampling risk impact the efficiency or effectiveness of an audit?

    Audit risk is comprised of inherent risk, control risk, and detection risk. The level of substantive testing that the audit performs is based on detection risk, which is set after the audit team assesses inherent risk and control risk. Variable Sampling – Substantive Testing When the audit team is performing substantive testing, they will use […]

  • What happens if control risk is set too high or too low?

    Audit risk is comprised of inherent risk, control risk, and detection risk. Depending on how the audit team assesses control risk, they would set detection risk, which determines the level of substantive testing that should be performed. To assess control risk, the audit team would use attribute sampling to determine if the controls were operating […]