How is Expected Loss typically defined?

Expected Loss is typically defined as a projection of the frequency and severity of losses based on historical statistics. This definition is pivotal in risk management and insurance actuarial practices as it allows companies to assess potential future claims based on their past experiences. By analyzing historical data, insurers can estimate how often claims are likely to occur (frequency) and the average amount they expect to pay for those claims when they arise (severity). This information is crucial for setting premiums, maintaining adequate reserves, and ensuring the overall financial stability of the company.

The other options, while related to financial and operational aspects of insurance, do not accurately capture the specific meaning of Expected Loss. Processing costs for claims focus on the administrative side of handling claims rather than the losses themselves. Projections of potential gains based on historical data imply a focus on profit rather than losses, while average losses paid out across several years does not specifically take into account the frequency aspect, which is essential for a comprehensive understanding of Expected Loss.