INCURRED (A.K.A. 'INCURRED LOSSES')THE TOTAL AMOUNT OF PAID AND RESERVE LOSSES FOR A CLAIM OR POLICY PERIOD.

Incurred Losses – The Total Paid and Outstanding Claim Amounts

In plain language: Incurred losses in insurance refer to the sum of all the expenses an insurance company has paid for claims, as well as the funds it has reserved to settle future claim payments.

Technical definition: In terms of property and casualty insurance, the term 'incurred losses' represents the sum of paid claims and any changes to the reserves for future claim payments during a specific period, usually a policy or calendar year. This concept is commonly featured in loss reserves, financial reporting and plays a significant role in premium calculations and the financial health of an insurance company.

Imagine operating an insurance company and you're assessing financial stability. In addition to the money already paid out in claim settlements, there's more claims information that you haven't paid but are committed to paying. This is where the concept of incurred losses comes in handy.

TL;DR

Incurred losses include all expenses for settled and unsettled claims.

It's pivotal in the claims, risk management, and financial reporting processes.

A common misunderstanding is the assumption that incurred losses equal paid claims.

Agencies should monitor incurred losses to aid in rating, underwriting performance, and planning safety programs.

Key Related Terms to Know

Incurred but not Reported (IBNR) - Claims that have happened but the insurance company hasn't received a notification about them yet.

Allocated Loss Adjustment Expenses (ALAE) - The direct costs of settling claims such as legal, professional fees, and other fees associated with claim management.

Loss Reserve - The amount an insurer sets aside to cover claims that have been reported but not yet paid.

Expense Ratio - The ratio of the underwriting expenses to the earned premiums, determining the efficiency of the underwriting activities.

Experience Modification - A rating adjustment made to premium calculations based on past claim costs and loss history.

Common Questions About Incurred Loss

What's the difference between incurred loss and paid losses?

Incurred loss includes both the amount the insurance company has paid on claims and the amount set aside for reserves. On the other hand, paid losses only include the claims that the insurance company has paid, ignoring reserves for future obligations.

What impact does an increase in incurred losses have?

An increase in incurred losses can hurt the company's financial stability and potentially increase premiums for policyholders. If incurred losses rise, companies may also need to review their underwriting procedures, loss control measures, and risk management strategies.

How do incurred losses contribute to the combined ratio?

Incurred losses, along with loss adjustment expenses and underwriting expenses, make up the numerator in the calculation of the combined ratio--a key measure of an insurance company's profitability.

What role do incurred losses play in reinsurance?

When insurance companies consider reinsurance contracts, understanding their incurred losses becomes pivotal. Higher incurred losses might indicate a need for additional reinsurance to hedge against the risk, impacting an insurer's balance sheet and financial stability.

Incurred Losses vs. Paid Losses

In an industry often filled with technical jargon, it's no wonder that incurred losses and paid losses are commonly confused concepts.

Comparison Area	Incurred Losses	Paid Losses
Primary use case	Financial stability assessment and risk management	Tracking claim payments
Coverage/concept type	Broad consideration (paid and reserved amounts)	Only considers paid claims
Who is most affected by errors	Insurance company, reinsurance partners, and regulators	Policyholders and claimants
Common mistakes	Incorrect estimation of reserves; Underestimating potential claim payments	Paying out more than covered by policy terms; incorrect claim settlements

Real Claim Examples Involving Incurred Loss

Scenario 1: A client files a claim for property damage due to a fire. The insurance company pays the claim and also sets aside reserves for potential additional costs tied to the claim, contributing to the insurance company's incurred losses.

Scenario 2: A patron slips and falls at a policyholder's retail store. The policyholder reports the incident to the insurance company, which sets aside reserves to cover potential future claims from the incident. These events increase the insurance company's incurred losses.

Scenario 3: Following an auto accident, an insured party files a claim with their insurance company. The insurance company pays the claim and also foresees potential medical expenses for the policyholder in the future. This expected obligation is set aside as a reserve, contributing to the company’s incurred losses.

Limitations and Common Mistakes

Thinking of incurred losses only as paid claims.

Not adjusting reserves based on evolving claim scenarios.

Not tracking incurred losses over time, making accurate risk assessment difficult.

Failing to include incurred losses in the calculation of loss ratios and underwriting profits.

How to Explain Incurred Loss to Clients

Personal Lines client "It's like your monthly budget, where you account for both what you've spent and what you know you'll have to pay in the future. Same goes for your insurance company when dealing with claims."

Small Business owner "Incurred losses help your insurance company assess their ability to cover claims. This includes not only claims they've paid but also those they expect to pay in the future."

CFO or Risk Manager "Think of them as the forecasted spend for claims. This includes paid amounts and reserved funds for unsettled claims which impact your company's profitability and the premium you pay."