What does the IBNR formula calculate?

The IBNR formula, which stands for Incurred But Not Reported, is utilized in the insurance industry to estimate losses that have occurred but have not yet been reported to the insurer. It represents a critical component in determining a company’s overall liability for claims.

The correct formulation for calculating IBNR typically involves understanding that IBNR is the total estimated liabilities minus what has already been accounted for through paid losses and reported reserves. When focusing on the calculation for IBNR, it is essential to consider how various elements contribute to an accurate assessment of future liabilities.

In this context, the formula that effectively captures the essence of IBNR would be understood as the open loss reserves minus the case reserves. This negative relationship illustrates that the losses that have incurred but have not yet been reported can be thought of in terms of the reserves allocated for claims that are already in the system versus those that remain unreported.

While other options might present relevant concepts related to reserves and paid losses, they do not capture the specific focus of IBNR, which aims to assess those latent losses that have yet to enter the claims process. Understanding this distinction is vital for accurately calculating and managing risk for an insurance portfolio.