What is the purpose of a Loss Development Factor?

The purpose of a Loss Development Factor (LDF) is to determine the estimate of ultimate losses from current valuations. LDFs are statistical tools used in the insurance industry to adjust reported losses over time, reflecting how claims develop from their initial report to their ultimate settlement. This means that LDFs help actuaries and underwriters predict future losses based on historical data.

When losses are reported, they are often not finalized and can continue to develop as claims are processed, additional information is gathered, or legal processes unfold. By applying the LDF, insurers can more accurately project the total amount they might eventually pay out, which is vital for reserve setting and financial reporting. This estimation allows insurers to maintain sufficient reserves and manage their financial health responsibly.

In contrast, the other options pertain to different aspects of insurance operations. Calculating premiums is a different function, while assessing profitability is more related to overall financial control rather than individual loss development. Measuring client satisfaction is not directly related to the purpose of LDFs, as they focus on loss estimation rather than customer experience.