Substantiating the Incurred but not Reported Reserve

Abstract

In order to handle past and future liability taken by insurance contracts concluded, any insurance company must constitute and maintain technical reserves. Substantiating technical reserves is done through actuarial methods and its over-evaluation or under-evaluation influence solvency and financial performance of the insurance companies, in the sense of reducing solvency through over-evaluating reserves and, respectively, influencing profit (hence of outstanding tax) through under-evaluating reserves. An important reserve for insurance companies is represented by the incurred but not reported reserve, as it allows the estimation of the liability the company may confront in the future, generated by events occurred in the past, which are not currently known in the present but will be reported in the future.

Keywords

• incurred but not reported reserve
• chain-ladder method
• run-off triangle
• development factors
• reported but not settled.