Ultimate Net Loss

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DEFINITION

A party's total financial obligation when an insured event occurs. The insured's ultimate net loss from costs such as property damage, medical expenses and legal fees will be offset by the portion of the loss that is paid by the insurance company (usually the amount of the claim that exceeds the insured's deductible, up to the policy maximum). Thus, the insured's loss will often be limited to the policy deductible unless the total loss exceeds the policy maximum.


An insurance company's ultimate net loss from a claim may be offset by the salvage value of any recoverable items, awards from successful claims against third parties, money from reinsurance and the policyholder's deductible and policy maximum. Ultimate net loss can be a generic term that refers to the total amount of any loss, but in finance it is most commonly used to refer to an insurance company's total loss from a policyholder's claim.



INVESTOPEDIA EXPLAINS

Insurance companies can protect themselves against large ultimate net losses by sharing policy risk with reinsurers. When an insurer shares a portion of the premiums it collects with a reinsurance company, it gains protection against a portion of its claims losses. For example, an insurance company might receive $30,000 in annual premiums for a $10 million policy. To protect itself against the threat of a $10 million loss, the insurance company might cede $15,000 of the annual premium to a reinsurer, who would agree to cover $5 million of the potential loss.


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