GIM6100 - Technical provisions: accounting periods beginning before 1 January 2000: reported claims and “incurred but not reported” (IBNR)

Reported claims

The provision for reported claims is the company’s estimate of the amount which it will have to pay in respect of claims which have been notified to it but which remain unsettled at the year end. Such claims are usually estimated by the company on a case by case basis, but paragraph 47(1) Schedule 9A CA 1985 allows for statistical methods to be used where they result in an adequate provision having regard to the nature of the risks.

In general reported claims do not cause difficulties, but there may be scope for closer examination where large claims are likely to be litigated, or the subject of prolonged negotiation between insurer and insured, or where there is doubt about the statistical methods used.

Incurred but not reported (IBNR)

For claims incurred but not reported (IBNRs), a company is obliged to use statistical methods, whether or not it does so for reported claims. These will be allowable so long as they are quantified with an appropriate degree of reliability. In Southern Pacific Insurance Company (Fiji) Ltd v CIR (1986 STC 178), a Privy Council case, the company claimed a deduction for an estimate of claims incurred but not reported. The court accepted that the liability of the company for accidents which occurred but were not reported in a particular year was part of the expense of the company in carrying on its insurance business during that year and should be deducted in arriving at the total income of the company. Two main principles emerged from the case. Firstly, it is a question of fact whether a company’s calculations and forecasts are sufficiently reliable to justify a deduction and secondly, when the reserve is being calculated, evidence in a company’s possession cannot be ignored. (In the particular case there was evidence that a certain percentage of claims were normally unsuccessful and the company was obliged to adjust its estimate accordingly).

A company just beginning to write general insurance business will have no claims experience of its own from which to predict IBNRs. It could be argued that until it can, there should be no deduction, and that was the outcome in the Southern Pacific case. However, the Revenue has normally been prepared to consider IBNRs based on industry statistics rather than the company’s own, subject of course to the company demonstrating that these are appropriate to the business it is actually writing, or are modified to take into account any differences. A company which is a new entrant to insurance business will have had to submit a business plan to the FSA (or home state regulator) in which it may set out how it expects to determine IBNRs - see FSA Handbook AUTH 3.9.9.