Incurred But Not Reported (IBNR)

The essence of IBNR: an insurance executive staring pensively out a window, saying to himself, “it’s quiet...a little too quiet.”

Accidents happen all the time. People can take a little time to report them. At any given time, an insurance company has customers who have incurred damage, but haven’t reported the incident yet. That figure represents "incurred by not reported."

Your high school crew is in town and you head out to the strip club. When you get back to the parking lot (bleary-eyed and disheveled), you discover that someone has busted your window and stolen the change you had in the cup holder.

You don’t want your spouse to know where you were when you got robbed, so you don't want the location listed on the official report. As a result, you don't report it right away. Instead, the next day, you call from a Wendy's parking lot and tell your insurance agent "oh my gosh, I just came back from my Dave's Double-Stack and found my window busted out!"

Now imagine the situation from the insurer's point of view. At midnight on Saturday, your window gets broken. The company will be liable for the damage. But they doesn't know it yet. They won't realize they owe money to fix the glass until you call from Wendy's at noon on Sunday.

For that period of time, the liability is incurred but not reported.

The IBNR figure is an estimate of this total, the aggregate amount of liability that the company owes based on events that have occurred but haven't officially come to the insurer’s knowledge yet. Obviously, the amount is an educated guess, based on past experience. Unless your insurer employs psychics.