Boca Raton, FL – NCCI recently released a new Insights Brief on COVID-19, Premium Audits and EBNR, and lessons learned from the past.
When thinking about COVID-19 and premium audits, our first thoughts go to the challenges auditors may have with in-person audits and staying safe. While worker safety is always the paramount consideration, our subject today is about a related issue—the accuracy and timeliness of the financial estimates carriers are required to make for the premium these audits generate.
This financial estimate, known as Earned but Not Reported premium (EBNR), is the premium counterpart to the better-known Incurred but Not Reported component of loss reserves (IBNR). The difference is that EBNR is an asset, whereas IBNR is a liability. EBNR has always been important but is generally less impactful than IBNR.
While not common, IBNR changes may affect industry results from time to time as insurers routinely review and adjust their loss reserves. On the other hand, EBNR can go for long periods without a deep review due to the stability in audit premiums. With the current recession underway, leaving the EBNR assumptions unchanged can be impactful—and sometimes in surprising ways.
Premium billing lags can contribute to EBNR (which is why it is also called Earned but Unbilled premium or “EBUB”), but the greatest impact in workers compensation insurance comes from payroll audits. When audited payroll is larger than the up-front estimated payroll, additional premium due results at audit. The opposite results in a return of premium to the insured at audit. Usually, the audit-additional premiums are fairly stable, but when a recession strikes, this may change.
Read the full brief: NCCI Insights: COVID-19, Premium Audits and EBNR