IBNR techniques

In the past, non-life insurance portfolios were financed through a pay-as-you-go system. All claims in a particular year were paid from the premium income of that same year, no matter in which year the claim originated. The financial balance in the portfolio was realized by ensuring that there was an equivalence between the premiums collected and the claims paid in a particular financial year. Technical gains and losses arose because of the difference between the premium income in a year and the claims paid during the year.

The claims originating in a particular year often cannot be finalized in that year. For example, long legal procedures are the rule with liability insurance claims. But there may also be other causes for delay, such as the fact that the exact size of the claim is hard to assess. Also, the claim may be filed only later, or more payments than one have to be made, such as in disability insurance. All these factors will lead to delay of the actual payment of the claims. The claims that have already occurred, but are not sufficiently known, are foreseeable in the sense that one knows that payments will have to be made, but not how much the total payment is going to be. Consider also the case that a premium is paid for the claims in a particular year, and a claim arises of which the insurer is not notified as yet. Here also, we have losses that have to be reimbursed in future years.