What is IBNR, and why does it matter for a captive?
IBNR is a claim you know is coming but has not been paid.
IBNR stands for incurred but not reported. As explained in this conversation, it covers claims already known about, with an estimate attached, that have not yet been settled. Jack Meskunas, Managing Director at Oppenheimer, adds that estimates can develop over time, and that telling the financial advisor early gives them months to position the portfolio rather than being asked for the money on a Friday.
The concept is straightforward. There is a claim out there, it is going to have to be paid, and there is an estimate of what it will cost.
What complicates it is claim development. Meskunas uses a deliberately round illustration: a claim estimated at a hundred thousand dollars may, if it takes a couple of years to settle, become a hundred and fifty thousand. The number is an example he invents to make the point, not a benchmark.
Key takeaways
IBNR means incurred but not reported: a known claim that has not yet been paid.
Claim estimates can develop upward over the time a claim takes to settle.
Early notice lets the advisor adjust the portfolio rather than liquidate under time pressure.
His practical concern is communication rather than accounting. He describes captives that learn about a claim, say nothing, and then call needing a million dollars by Friday. Asked when they first knew, the answer was three years ago.
He is careful that liquidity was never the problem, because in his portfolios the assets can be sold and the money paid. The cost of silence is different: with notice, he says there may be ways to adjust the portfolio over the following months to reduce the effect on overall return. That is why he treats circular communication between the insureds, the captive, the service providers and the advisor as important.
From the conversation
Jack Meskunas
Managing Director, Oppenheimer
“we have to pay a million dollar claim and we need the money by Friday. And I said, well, when did you know about this? Oh, three years ago”
Transcript
Read the full transcript 18 turns
IBM R, we're, having all gamut of audiences. So IBM R is incurred, but not reported.
Right. And so, it's basically, we know there's a claim out there. We know we're going to have
to pay it. We have an estimate of what that is. And there could be claim development. In other words,
they might say maybe there's a, just make up a number. There's a hundred thousand dollar claim
and, over if it takes a couple of years to pay, you know, maybe that hundred thousand becomes
a hundred and fifty thousand or whatever it might be. so, the captive will hear,
they'll hear about a claim. And if they don't tell me the financial advisor and they just say,
and they wait until they have to pay it, sometimes I've, had captives where they've said, well,
we have to pay a million dollar claim and we need the money by Friday. And I said, well, when did
you know about this? Oh, three years ago, well, maybe if you had told me, you know, first of all,
because everything I do is liquid, it's never a problem. That, money is there. It's ready
to, it can be sold. It can be paid. That's never the issue. But if you let the financial advisor know,
hey, we had this big claim. It was out of the ordinary. We expect to have to pay it in three
months, six months, a year, whatever it is, you let, you let me know. Then maybe at over the next
few months, there's ways to adjust the portfolio to, minimize, the effect on the overall
return. So that's, it's important that, circular communication amongst the service
providers and the insurance and the captive and the financial advisor are extremely important.
And
The views expressed are those of the featured guest, drawn from a recorded conversation, and reflect their own professional experience. Nothing on this page is insurance, tax, legal, or investment advice. Consult your own advisors about your specific situation.
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