Reserves are added to which quantity when determining ultimate losses, and why?

• A. Paid losses, since we estimate the ultimate paid amounts and IBNP is included in the reserve to avoid double counting.
• B. Incurred losses, to reflect all reported losses.
• C. Reported net losses, to exclude IBNP.
• D. Ultimate losses, to align with paid and incurred totals.

Answer: (A)

When estimating ultimate losses, you start from the losses that have already been paid and then add a reserve for what remains to be paid. The unpaid portion is represented by incurred but not paid (IBNP), captured in the reserve. If you used incurred losses as the base, you’d be counting IBNP twice because incurred losses already include that unpaid component. So the appropriate base is paid losses, with a reserve for IBNP bringing the total up to the ultimate losses.