Incurred Losses
Total claim costs including amounts already paid plus reserves for estimated future payments on open claims.
What It Is
Incurred losses represent the total cost of claims for a given period, combining amounts already paid to claimants with outstanding reserves set aside for future payments on claims still open. The formula is: incurred losses = paid losses + ending reserves - beginning reserves. This metric provides a more complete picture of claim costs than paid losses alone, which only reflect what has been disbursed to date.
For example, if a liability claim has paid $50,000 in defense costs to date and the carrier has set a reserve of $200,000 for the anticipated settlement, the incurred loss is $250,000. If the carrier then increases the reserve to $350,000, incurred losses increase by $150,000 even though no additional payment has been made.
Incurred losses can be reported on either a calendar-year or accident-year basis. Calendar-year incurred losses include all claim activity during the calendar year regardless of when the loss occurred. Accident-year incurred losses group claims by when the underlying event happened, providing a more accurate view of how each policy period is performing. Underwriters primarily use accident-year incurred losses for pricing and renewal decisions.
Why It Matters for Brokers
Brokers must understand incurred losses because this is what underwriters use to evaluate an account's profitability. A client might believe their loss history is clean because they see few actual claim payments, but large reserves on open claims can make the incurred loss picture significantly worse. Brokers who can discuss incurred losses intelligently with underwriters are better positioned to negotiate on behalf of clients.
Real-World Example
A retail chain's workers compensation program shows $180,000 in paid losses over three years, which the client considers favorable. However, loss runs reveal $420,000 in outstanding reserves on four open indemnity claims. Total incurred losses are $600,000 against $900,000 in earned premium, producing a 67% incurred loss ratio. The underwriter prices the renewal based on the 67% incurred ratio, not the 20% paid ratio the client expects. The broker explains the reserve impact to the client and works with the carrier to review reserve adequacy on the open claims.
Common Mistakes
- 1Presenting paid loss ratios to clients while the carrier is evaluating incurred loss ratios, creating misaligned expectations about renewal pricing.
- 2Not challenging excessive reserves on open claims, which artificially inflate incurred losses and lead to higher premiums.
How brokerageaudit.com Handles This
brokerageaudit.com parses loss runs to calculate both paid and incurred loss ratios, clearly displaying reserve amounts on open claims. The system highlights claims where reserves appear disproportionate to the claim type, prompting brokers to request reserve reviews from the carrier before renewal underwriting begins.