Definition of Incurred Losses
In the insurance industry, incurred losses refer to the total amount of loss related to claims that an insurance company is responsible for over a specific time period. This includes both the losses paid out to policyholders and the adjustments for unpaid losses. The concept is crucial for insurance companies in assessing their financial health.
Calculation
The calculation of incurred losses is the sum of:
- Losses paid during the period: These are the actual sums disbursed to claimants.
- Outstanding losses at the end of the period: These include losses from new claims and ongoing claims not yet settled.
- Minus outstanding losses at the beginning of the period: These are the existing claims pending at the start of the period which had not yet resulted in payments.
The formula can be expressed as:
Incurred Losses = Losses Paid + Ending Outstanding Losses - Beginning Outstanding Losses
Importance in Insurance Accounting
Understanding incurred losses is essential for maintaining accurate loss reserves and for financial reporting. It affects a company’s profitability calculations and plays a pivotal role in pricing policies and determining the need for reinsurance.
Regulatory Perspective
Insurance regulators often scrutinize incurred losses to ensure the solvency and stability of insurance companies. Properly accounting for these is mandated under various regulations, notably by governing bodies like the National Association of Insurance Commissioners (NAIC) in the U.S.
References
For a thorough understanding, you may refer to resources such as insurance accounting guides and the relevant sections on loss provisions under the Insurance Services Office (ISO) standards or government regulations like those of the NAIC.
