RESERVING BASICS: Why do insurers need IBNR?
IBNR ( incurred but not reported ) reserves are claims that have not yet been reported.
There would generally by two types of these claims. Those that are identified and reported fast and those that take much longer to identify.
The former is so called short tailed class. A fire in a building, a bridge collapse or traffic accident. Even though there may be complexities in estimating the damages and repair costs, these would usually take days to weeks. In some cases months but rarely years.
The other class are the long tailed. These are cases where damages take much longer to develop. A prime example would be some occupational disease claims under workers' compensation covers. These would include asbestos, silicosis or other health damaging agents.
The tail element has nothing to do with the term of policy. A policy can be 10 years long, but could still be seen as a short tailed class of business. The tail aspects refers to the length of time it takes for claims to eventually pay out.
As you'd have most certainly worked it out by now, the need for IBNR reserves will be greater in long tailed line of business. This is where it may take years for damages to manifest and even more to finally settle the claim. These can be further complicated due to prolonged legal disputes and varying market conditions.
To estimate IBNR reserves actuaries employ various techniques available to them. These can range from basic such as chain ladder or Bornhuetter–Ferguson triangulation methods to more complex based on stochastic models.
If you are interested in some of the IBNR methods here are some interesting, albeit technical, papers.
https://www.actuaries.org.uk/system/files/documents/pdf/crm1-I.pdf
https://www.casact.org/sites/default/files/database/forum_89fforum_89ff039.pdf
On general actuarial science knowledge follow the links to national organisations
Institute and Faculty of Actuaries
At the next post we can take a look at some of these.
Cheers
M | K