How can ultimate losses be calculated?

Ultimate losses represent the total amount of losses that an insurer expects to pay for claims incurred during a specific period, including both reported and unreported claims. The correct method to calculate ultimate losses is by considering all components of liabilities associated with incurred claims.

In this context, the calculation involves three critical elements: Incurred But Not Reported (IBNR) losses, case reserves for reported losses, and paid losses. IBNR refers to losses that have occurred but have not yet been reported to the insurer, while case reserves account for losses that have been reported but are still pending payment. Paid losses, on the other hand, are the amounts that have already been disbursed to settle claims.

By summing these three components—IBNR, case reserves, and paid losses—you arrive at the ultimate losses. This total reflects the insurer's expectation of all potential payouts for claims that have occurred during the period, making it a comprehensive gauge of the insurer's financial obligations related to those claims.

In contrast, using only one or two of these components would fail to provide a complete picture of the liabilities. For instance, solely relying on IBNR - case reserves + paid losses would not account for all liabilities fully, and the other options