What does the term 'incurred losses' refer to?

The term 'incurred losses' refers to the total amount of paid claims and case reserves associated with a defined period, making this definition the most accurate. Incurred losses represent the expenses an insurance company incurs from claims made by policyholders during a specific timeframe. This includes not only the claims that have already been paid but also the reserves set aside for claims that the insurer anticipates paying in the future. These reserves are critical for financial reporting and underwriting purposes, as they reflect the company’s expectations regarding future claim payments.

The concept of incurred losses is vital in the insurance industry for assessing profitability and ensuring that the company maintains sufficient reserves to cover liabilities. By evaluating incurred losses, insurers can also better understand their risk exposure and pricing strategies.

In contrast, claims currently under litigation, total premiums collected, or estimated future claims, do not fully capture the essence of incurred losses as they either only focus on a part of the claims process or address different financial metrics that insurance companies monitor. Thus, relying solely on premiums or claims litigation would miss the comprehensive scope that incurred losses cover.