Health insurance claims are not reported or paid instantaneously. A member may receive medical services in January, but the corresponding claim might not be paid until May. At the time the books close for first quarter (Q1), that liability already exists, but it may not yet be fully reflected in the insurer’s paid claims data.
At any point in time, there is a meaningful gap between what has been paid and what will ultimately be owed for services already rendered. The IBNR reserve accounts for this gap. It represents an estimate of claims that have already been Incurred But Not Reported, hence the acronym IBNR.
In practice, the term IBNR is sometimes used loosely as shorthand for unpaid claim reserves, but in a stricter sense it is incomplete in its coverage of unpaid liabilities. Incurred But Not Paid (IBNP) is another term commonly used in industry. IBNP includes claims in course of settlement (ICOS) and due and unpaid (D&U) claims.1 In that stricter usage, IBNR refers only to claims that have been incurred but not reported, while IBNP includes both unreported claims and those that have been reported but not yet paid, making IBNR a subset of IBNP.
Additional categories of unpaid liabilities may include loss adjustment expenses (LAE) and premium deficiency reserves (PDR),2 which are typically accounted for separately and may fall outside the scope of the standard reserving process.
For the purposes of this guide and within the IBNR.net platform, the term IBNR is used interchangeably with reserves.
Who Needs IBNR Reserves?#
Any organization that bears financial risk for health claims should account for IBNR reserves. This includes health insurance carriers, self-funded employer groups, managed care organizations, and stop-loss reinsurers. For regulated insurers and in many other financial reporting contexts, liabilities are measured on an incurred basis rather than a paid basis, although the exact accounting and reporting requirements vary by entity type and framework.
Beyond traditional insurers, IBNR estimation is relevant to a broad range of stakeholders. Third-party administrators (TPAs) managing self-funded plans need accurate IBNR figures to report to their employer clients. Provider organizations operating under capitated or risk-sharing arrangements must estimate outstanding liabilities to assess the profitability of their contracts. Government programs such as Medicaid managed care plans are similarly required to hold adequate reserves.
The common thread is that wherever there is a delay between the delivery of medical services and the payment of corresponding claims, there is a need for IBNR reserves. The length and variability of that delay, and the financial consequences of getting the estimate wrong, determine how much rigor and frequency the reserving process demands. Organizations with high claim volumes, long payment lags, or volatile utilization patterns will generally require more sophisticated and frequent reserve analyses.
IBNR’s Role in Actuarial Work#
Accurately estimating reserves is a critical function for health insurers, and actuaries are uniquely qualified to perform these calculations. Regulators, auditors, and internal finance teams all rely on an accurate IBNR estimate to assess the true cost of the business.
IBNR plays an important role across multiple areas of actuarial work:
- Pricing: When setting insurance premium rates, actuaries need to know the true cost of prior periods to price future premiums. IBNR estimates fill in the gap so that rate-setting reflects the full incurred cost of claims, not an understated paid-to-date figure.
- Forecasting: Similar to pricing, projecting future medical spend requires a complete picture of current and past costs. Without IBNR, recent months would appear artificially low, distorting trend analyses and leading to unreliable projections. This equally applies to budgeting, where finance teams rely on IBNR-adjusted incurred claims to set accurate medical cost budgets and track performance against them.
- Reserving: Proper reserving ensures that an insurance company has set aside enough funds to meet obligations arising from unpaid liabilities. This process protects the financial stability of the carrier, satisfies regulatory expectations, and demonstrates prudent risk management.
- Ad hoc analysis: When performing analysis using recent claims data, adjusting for reserves (i.e. “completing” the data) should always be a consideration.
Larger organizations and insurers may employ a dedicated reserving team responsible for producing regular IBNR estimates, which are shared with stakeholders and teams throughout the organization for the various functions outlined above. Smaller organizations may calculate IBNR on a situational basis, updating the process as needed. In either case, the accuracy of the IBNR estimate has important implications for the organization’s internal and external stakeholders.
Statements of Actuarial Opinion#
For relevant regulated organizations, claim reserves are a key component of the Statement of Actuarial Opinion (SAO), which is required as part of the NAIC Annual Statement filing.3
Key requirements from the NAIC Health Annual Statement Instructions include:
“There is to be included on or attached to Page 1 of the annual statement, the statement of the appointed actuary setting forth his or her opinion relating to claim reserves and any other actuarial items.”
The appointed actuary must be a “qualified health actuary,” defined as “a member in good standing of the American Academy of Actuaries, or a person recognized by the American Academy of Actuaries as qualified for such actuarial valuation.”
“The Actuarial Opinion and the supporting Actuarial Memorandum and work papers must conform to the appropriate Actuarial Standards of Practice (ASOPs), as promulgated by the Actuarial Standards Board.”
For health claim reserves, ASOPs No. 5 (Incurred Health and Disability Claims), No. 23 (Data Quality), and No. 41 (Actuarial Communications) provide guidance on the methods, assumptions, data considerations, and communications involved in estimating health claim reserves. ASOP No. 42 (Health and Disability Actuarial Assets and Liabilities Other Than Liabilities for Incurred Claims) complements ASOP No. 5 by providing additional guidance. ASOP No. 56 (Modeling), particularly Section 3.4 (Reliance on Models Developed by Others), is also particularly relevant when using IBNR.net to estimate reserves.
The SAO serves as an important layer of accountability, ensuring that a qualified actuary has evaluated the reasonableness of the reserves reported to regulators. For credentialed actuaries utilizing IBNR.net to set reserves, the report generation feature is designed to align with the requirements set forth by the NAIC and Actuarial Standards Board. References to the appropriate ASOPs and sections are automatically included in the report.
References#
1. Society of Actuaries. Comparison of Incurred but not Reported (“IBNR”) Methods, pg. 9. https://www.soa.org/globalassets/assets/files/research/projects/research-ibnr-report-2009.pdf
2. Society of Actuaries. Reserving 101 for Health Actuaries, pg. 12. https://www.soa.org/globalassets/assets/files/e-business/pd/events/2019/val-act/pd-2019-08-valact_session-046.pdf
3. NAIC. Health 2025 Annual Statement Instructions — Statement of Actuarial Opinion, pg. 9. https://content.naic.org/sites/default/files/publication-asi-heaa-25.pdf
Disclaimer: This article is a work in progress and reflects the opinions of Jeff Yang, FSA at IBNR.net. It is intended for educational purposes only and should not be relied upon as the sole basis for professional decisions. Readers should exercise independent judgment when making actuarial or financial decisions. Please contact support@ibnr.net if you have feedback or identify any mistakes on this page.