Incurred losses for a calendar year are defined as which of the following?

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Multiple Choice

Incurred losses for a calendar year are defined as which of the following?

Incurred losses for a period capture the total cost of claims that occurred during that period, which includes cash already paid and the change in what you still expect to pay for those claims. In practice, that means you take the losses paid during the year and add the change in loss reserves over the year (the ending reserve minus the beginning reserve). This combines actual payments with the evolution of the liability estimate, giving a complete measure of the year’s loss experience. For example, if you started the year with a reserve of 100, paid 60 during the year, and ended with a reserve of 130, the change in reserve is 30. Incurred losses would be 60 + 30 = 90. If the end-of-year reserve dropped to 80, the change would be -20, and incurred losses would be 60 + (-20) = 40. This shows how reserve changes affect the total. Earned premiums are not part of incurred losses; they relate to revenue, not loss costs. So the correct definition is losses paid plus the change in reserve.

Incurred losses for a period capture the total cost of claims that occurred during that period, which includes cash already paid and the change in what you still expect to pay for those claims. In practice, that means you take the losses paid during the year and add the change in loss reserves over the year (the ending reserve minus the beginning reserve). This combines actual payments with the evolution of the liability estimate, giving a complete measure of the year’s loss experience.

For example, if you started the year with a reserve of 100, paid 60 during the year, and ended with a reserve of 130, the change in reserve is 30. Incurred losses would be 60 + 30 = 90. If the end-of-year reserve dropped to 80, the change would be -20, and incurred losses would be 60 + (-20) = 40. This shows how reserve changes affect the total.

Earned premiums are not part of incurred losses; they relate to revenue, not loss costs. So the correct definition is losses paid plus the change in reserve.

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