In finance, a loss refers to a negative income. It is the state that transpires when the business does not succeed in generating sufficient returns to cover all the expenses in line with its operations. Thus, costs exceed revenues resulting to a negative income.
In insurance, losses incurred, or simply pure losses, are the net losses paid at the current year along with the change of loss reserves from the previous year. Losses outstanding characterize the losses incurred but not yet paid, while losses paid represent the sums paid to claimants to settle an insurance claim.
Meanwhile, a loss control is a term used to indicate all the methods employed in order to minimize the severity and/or frequency of losses. This includes loss prevention, exposure avoidance, unit exposure segregation, risk transfer for non-insurance, and loss reduction. In other words, it is the employment of the proper methods to effectively control the occurrence of losses.
A loss reserve, on the other hand, is an estimated liability for insurance claims that have been unpaid, or for losses that took place in a given date of evaluation. This often includes IBNR, not yet due amounts, and due losses not paid so far. For an individual, a loss reserve is the estimated amount expected to be paid by the insurer for a particular reported claim.
There is also the term loss development. This signifies the process to change the estimated loss reserves amount to be more like a policy. It is computed by getting the difference among the losses paid with the outstanding estimated losses for an existing period and the losses paid with the outstanding estimated losses for a previous period. This often indicates developments for cases reported. A more comprehensive definition of loss development would take in claims for IBNR.
Additionally, there is also a loss being sustained in reinsured companies as required by various courts. This is the loss in excess of policy limit or XPL. This is intended to pay a loss amount that is in excess of the limit indicated in a policy; provided that such loss could have been incorporated in the coverage had the limit have been higher. This must be a result of an omission or error committed by the company reinsured in protecting its policyholders. Here, a policy holder is meant to be exposed to excessive losses of the limit in the policy.
To measure the business’ profitability on its overall book, the loss ratio is computed. This ratio represents the ratio of losses incurred and expenses for loss adjustments to earned net premiums.
Furthermore, there is the so called loss adjustment expenses. This represents expenses incurred for the investigation and settlement of losses. The account loss and loss-adjustment expenses contain the reserves in total for the losses unpaid, and other supplemental reserves set up by the business. It embodies the total business lines as well as all its accident years.
If the multiple of the reserves for losses is higher as against surplus, a business’s solvency is likely to be more dependent on having and sustaining the adequacy for reserves. This scenario can be identified using the loss and loss-adjustment reserves to policyholder surplus ratio.