The losses incurred (pure losses) of an insurance policy are an important measure that is expressed quantitatively (in terms of numbers) that indicate the percentage of an insurance premium that pays for losses.
Using a figure for the total losses incurred over a given period an insurance company how much money they need to set aside in appropriate reserves to cover their liability exposure. This is important to policy holders because without the appropriate level of financial backing to meet its obligations defined as pure losses, the company will quickly become insolvent and the policy holder is no longer guaranteed some or all of their benefits under their policy as a result.
What else can losses incurred be used for?
One of the advantages for an insurance company of tracking losses incurred is that the company can plot the results over time, and thus can examine the effectiveness of its risk management strategy in the past and in predict future levels of exposure to losses and inform the development of better risk management systems.
This is of particular benefit to policy holders in that their premiums are a reflection of the risk that the insurance company is exposed to, and while no-one wants to pay higher premiums this can be balanced against the need to ensure that premiums actually provide the benefits set out in the policy rather than going unpaid if the insurer were to fall into insolvency.
It is also possible that the insurer may be able to adjust their premiums downwards in the hope of attracting higher numbers of new customers and retaining existing customers, if the losses incurred are consistently below a threshold.
Why are losses incurred important to policy holders?
In most circumstances a policy holder will not be expected to understand the accounting and reporting requirements of their insurer, however this does not mean they do not benefit from the procedures and legislation affecting this.
Losses incurred not only provide an indicator for insurance companies to judge their profit making potential but also for external auditors, such as state bodies or accounting professionals to make judgments regarding their financial health. As such it may be possible to intervene prior to an insurance company failing to renew its financial robustness and thus protect policy holders from risk exposure they hadn’t planned for.
Losses Incurred – Other Definitions
- AMbest – Net paid losses during the current year plus the change in loss reserves since the prior year end…
- Insurance Advisors Of St. Louis – The losses incurred, or pure losses, for an insurance company are the value of losses actually attributable to events and activities, such as a covered event occurring to a policyholder, during the current year. The pure losses for a year may differ from the pair losses for a time period, if, for example, covered events occur at the end of one year and claims are actually paid during the following year…
- Wikipedia – Incurred but not reported (IBNR) is a term in common use in insurance. IBNR reflects the total amount owed by the insurer to all valid claimants who have had a covered loss but have not yet reported it…