INCURRED (A.K.A. 'INCURRED LOSSES')

Incurred aka Incurred Losses – Explained, Paid Plus Reserves

In plain language: Incurred losses are the total cost that an insurance company has to bear for claims. This includes both the amount already paid on claims and the estimated amount set aside for claims that are not settled yet.

Technical definition: Incurred losses represent the summation of paid losses and the change in claim reserves over a particular accounting period. They're commonly detailed in the company's financial statements and provides a measure of an insurer's financial performance. It's an essential term associated with loss analysis, loss ratios, and the financial health of an insurance carrier.

Dealing with the messy puddle of insurance claims? You've probably heard of incurred losses. But what they really are and why they matter can sometimes feel like digging through a dense insurance textbook.

TL;DR

Incurred losses are the total costs an insurer encounters for claims, both paid and reserved.

They are crucial for understanding an insurance company's financial health and the overall performance of the insurance industry.

A common misunderstanding involves the difference between "incurred" and "paid" losses.

To avoid costly mistakes, agencies should ensure accurate calculations of incurred losses, reflecting actual and potential claim expenses.

What Is Incurred aka Incurred Losses in Insurance?

When it comes to understanding incurred losses, it's essential to draw a clear distinction between paid losses and incurred losses. Paid losses are pretty straightforward – they're the amounts insurance companies have forked over to policyholders to settle claims. Incurred losses, on the other hand, add in an extra layer, involving not only the paid amounts but also amounts reserved for future payments on claims. This includes both losses related to paid claims and claims that have been reported but not yet paid (incurred but not reported).

An accurate representation of incurred losses plays a significant role in financial reporting for insurance companies, enabling the calculation of key metrics like the incurred loss ratio, evaluating the financial health, and managing claim reserves properly. This information serves as a barometer for an insurance company's fiscal standing and is crucial for industry-level loss analysis, financial planning, and strategic decision-making.

Key Related Terms to Know

Fire Legal Liability Coverage - This is coverage under a CGL policy held by a tenant to cover for damages to a rented premise due to fire caused by negligence or actions.

Commercial General Liability (CGL) Policy - It's a policy that covers businesses from liabilities arising from injuries or damages to the property of others.

Per Occurrence Limit - The maximum amount an insurer will pay for all claims resulting from a single incident.

General Aggregate Limit - The maximum amount an insurer will pay for all covered losses during the policy period.

Property Damage Coverage - Coverage in a liability insurance policy paying for damage to a third party's property.

Common Questions About Incurred aka Incurred Losses

How are incurred losses calculated?

Incurred losses are the sum of paid claims and changes in claim reserves. So, if an insurer has paid $10,000 in claims and added $5,000 to their reserves, the incurred losses would be $15,000.

Are incurred losses similar to incurred losses meaning in income statements?

Yes, in both cases, incurred refers to the revenue or expenses that have resulted from business activities during an accounting period, regardless of when the payment is made.

Does incurred mean paid in insurance context?

No, incurred refers to both the paid claims and the amounts reserved for future claims payments.

How do incurred losses impact an insurer's financial health?

High incurred losses can affect an insurer's financial health as it indicates more payouts compared to the premium earned.

Incurred Losses vs. Paid Losses

Understanding the difference between incurred losses and paid losses is crucial. Here's a comparison:

Comparison Area	Incurred Losses	Paid Losses
Primary use case	Analysis of financial health and profitability	Records actual amount paid for claims
Coverage / concept type	Encompasses both paid and reserved amounts	Only considers actual paid amounts
Typical exclusions	Does not consider administrative expenses	Does not include reserves or administrative expenses
Who is most affected by errors	Insurance carriers	Insurance carriers, policyholders
Common mistakes	Over or underestimating reserves, often due to inaccurate predictions	Faulty record-keeping and inaccurate claim settlements

Real Claim Examples Involving Incurred Losses

Scenario 1: A client makes a claim for property damage resulting from a storm. The insurer pays $8,000 for the immediate repairs, but reserves an additional $4,000 for potential additional damage found during the repairs. The insurer's incurred loss is, therefore, $12,000.

Scenario 2: A policyholder files the claim for injury and damage after a car accident. The insurance company pays medical costs and vehicle repair expenses amounting to $30,000. It also reserves $5,000 for projected ongoing care, making an Incurred Loss of $35,000.

Scenario 3: An insurer pays out $15,000 for a fire claim in a commercial property, estimating and reserving an additional $20,000 for extensive repair work revealed later. The company's incurred loss for this claim stands at $35,000.

Limitations and Common Mistakes

Assuming "incurred losses" simply refers to amounts paid in claim settlements. It includes not just paid losses, but also reserves for IBNR claims.

Treating allocated and unallocated loss adjustment expenses as an afterthought in loss-incurred calculations.

Not accounting properly for incurred claims can create misleading views of an insurer's profitability and financial health.

Overestimation or underestimation of claim reserves can lead to inaccuracies in incurred loss calculation.

How to Explain Incurred Losses to Clients

Personal Lines Client: "Incurred losses are like your monthly budget. It includes not only what you've already spent but also what you have put aside for expected costs in the future."

Small Business Owner: "Think of incurred losses as your total project expense - expenses you've already spent and funds you've reserved for future needs."

CFO or Risk Manager: "Incurred losses reflect both claims we've already paid and those we have estimated and reserved for future payment. They are a critical measure of our company's financial health and its capacity to cover current and future losses."

Don't let the technical terms deter you from understanding the insurance landscape better. A thorough understanding of terms like incurred losses enhances financial knowledge, improves risk management, and improves decision-making processes.