Reserves are established for high volume benefits such as Health and Dental so that in the event the group terminates coverage, there is a buffer of premium to pay claims that were incurred prior to the termination date of the policy, but submitted after the termination date of the policy.
Insurance companies are required by the Insurance Act to collect reserves for claims that have been incurred but not yet reported.
Reserves are established at the first renewal with a new carrier and are usually expressed as a percentage of paid premium, or as a percentage of paid claims. At each subsequent renewal, the IBNR is recalculated based on paid premium or paid claims from the previous renewal period.
IBNR is 1 of 7 factors that influence group benefit rate adjustments.