Incurred losses definition
/What are Incurred Losses?
Incurred losses are those losses that an organization has sustained during a reporting period, even if the associated liability has not yet been settled. From the perspective of an insurer, incurred losses are the grand total of loss reserves and paid claims over the course of a policy year.
Examples of Incurred Losses
Here are three examples of incurred losses:
Auto insurance claims. An auto insurance company receives multiple claims from policyholders involved in car accidents during the year. Some claims are immediately paid out, while others remain unresolved, requiring the insurer to set aside loss reserves for expected payouts. The total incurred losses for the insurer include both the amount already paid to claimants and the estimated reserves for pending claims.
Homeowners insurance claims after a natural disaster. Following a hurricane, a homeowners insurance company faces a surge in claims for property damage. While it has already paid $5 million in settled claims, there are still hundreds of claims under review, with estimated future payouts of $3 million. The company's incurred losses for the event total $8 million, combining both paid claims and outstanding reserves.
Workers’ compensation insurance claims. An employer’s workers’ compensation insurer processes claims from employees injured on the job. Some cases involve immediate medical expenses, while others require long-term disability payments, which are not fully paid out yet but must be accounted for in reserves. The insurer’s incurred losses include both settled claims and expected future costs, ensuring it has enough funds to cover all liabilities.