Reported But Not Settled (RBNS)

What Is Reported But Not Settled (RBNS)?

Reported but not settled (RBNS) refers to losses reported to an insurance company that have not been settled by the end of the accounting period. Reported but not settled (RBNS) losses are calculated using an estimation of the severity of the loss based on the available information from the claims settlement process.

Understanding Reported But Not Settled (RBNS)

Calculating reported but not settled losses requires an understanding of where the claims are in the settlement process. The calculation is an estimate based on information an insurer has at hand, including information from court documents. The accuracy of the calculation depends on the type of loss subject to the settlement, with more complex claims being more difficult to estimate accurately. For example, a fire damage claim on a residential home may be easier to estimate than a product liability claim by a corporation.

Insurance companies calculate their claims and associated losses using a variety of sources. These include liabilities from the contracts that they underwrite, as well as contracts ceded to reinsurers, state regulations, court opinions concerning claims, and actuarial estimates. This information applies to loss adjustment and claims expenses.

An insurance company is required to set aside money, referred to as a claims reserve, in order to pay policyholders who file legitimate claims on their policy. The claims reserve is recorded as a liability on the insurer's balance sheet. The amount an insurer places in reserve to cover RBNS losses depends on state insurance regulations. For example, insurance companies may be required to set aside the average value for a similar class of claim for each unsettled claim.

Incurred but not reported (IBNR) losses must also be estimated and accounted for in the claims reserve.

Reported But Not Settled (RBNS) vs. Incurred But Not Reported (IBNR)

RBNS losses are similar to incurred but not reported (IBNR) losses in that neither have been settled during the accounting period; the difference lies with reporting as IBNR losses have not yet been reported to the insurance company. That means the level of estimation required is higher in the case of an IBNR loss.

In many cases, it may be difficult for an actuary to tell the difference between IBNR and RBNS losses, depending on the model used. This is because claims are developed differently according to the reporting year and the accounting year. These claims may be forecasted separately.

Benefits of Reported But Not Settled (RBNS) Estimates

Estimating IBNR and RBNS reserves is among the most important jobs an actuary has in an insurance company. These estimates affect the profitability of an insurance company, and bad estimates could have grave consequences.

If the actuary overestimates, it could lead to the insurance company having less money to invest in the market. It could also make it seem like the company is not performing well, which could lead to them increasing the price of their insurance products. 

If the actuary underestimates, it may seem as the company is performing well, and they might cut prices for their policyholders. This would render them ill-equipped for unforeseen claims from past accidents, which could have grave consequences for the insurance company. The worst-case scenario would be that they are insolvent.