What is 'Loss Development'

Loss development is the difference between the final losses recorded by an insurer and what the insurer originally recorded. Loss development seeks to account for the fact that some insurance claims take a long time to settle, and that estimates of the total loss that an insurer will experience will adjust as claims are finalized.

BREAKING DOWN 'Loss Development'

Insurance companies use loss development factors in insurance pricing and reserving to adjust claims to their projected final level. Insurers have to take a number of factors into account when determining what, if any, losses they may face from the insurance policies that they underwrite. One of the most important factors is the amount of time that it takes to process a claim. While claims may be reported, processed and closed during a particular policy period, they may also be reported in later policy periods and may not be settled for a long period of time. This can make reporting complicated and, at best, based off an approximation of the loss that the insurer will ultimately experience. 

Insurance claims in long-tailed lines, such as liability insurance, are often not paid immediately. Claims adjusters set initial case reserves for claims; however, it is often impossible to accurately predict what the final amount of an insurance claim will be for a variety of reasons. Loss development factors are used by actuaries, underwriters, and other insurance professionals to "develop" claim amounts to their estimated final value. Ultimate loss amounts are necessary for determining an insurance company's carried reserves. They are also useful for determining adequate insurance premiums, when loss experience is used as a rating factor

Loss Development Triangle

Insurers use a loss development triangle when evaluating loss development. The triangle compares loss development for a specific policy period over an extended period of time. For example, an insurer may look at loss development for the 2010 policy period at twelve month intervals over the course of five years. This means that it will examine the 2010 loss development in 2010, 2011, 2012, 2013, and 2014.

Insurers are required to report their financial position to state regulators who use these reports to determine whether an insurer is in good financial health or if there is a risk of insolvency. Regulators may use a loss development triangle to compare the percentage change across time periods, and use this percentage when making estimates of its loss development for a particular insurer in upcoming periods. If the rate of change fluctuates substantially over time the regulator may contact the insurer to find out why its loss estimates are off the mark.

  1. Policy Year Experience

    Policy year experience describes the relationship between the ...
  2. Insurance Industry ETF

    An insurance industry ETF invests primarily in insurance companies ...
  3. Insurable Interest

    An insurable interest is an economic stake in an event for which ...
  4. Excess Judgment Loss

    Excess judgment loss is the amount of additional loss that an ...
  5. Assigned Risk

    Assigned Risk is when an insurance company is required to provide ...
  6. Loss Constant

    Loss constant is an amount added to an insurance policy with ...
Related Articles
  1. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  2. Insurance

    12 Insurance Questions for High Net Worth Families

    High net worth families should ask themselves these 12 questions regarding comprehensive insurance.
  3. Tech

    How Big Data Has Changed Insurance

    No longer confined to technology, big data has become integral to providing solutions to the insurance industry's long standing challenges.
  4. Insurance

    How Much Life Insurance Should You Carry?

    Before purchasing life insurance it is important to decide if you really need it, what type of policy is best, and how much coverage you should get.
  5. Investing

    Elements of Insurable Risks: A Quick Guide

    Explore the elements of insurable risk: due to chance, measurable and definite, predictability, noncatastrophic, random selection and large loss exposure.
  6. Insurance

    Insurance Coverage: A Business Necessity

    Don't go to work without this policy in place - especially if your work is in your home.
  7. Insurance

    Homeowner's Insurance Guide: A Beginner's Overview

    Everything new homeowners need to know about homeowner's insurance to protect their residence.
  8. Insurance

    12 Car Insurance Cost-Cutters

    Car insurance rates are on the rise. If car insurance costs are dragging you down, use these tips to free yourself from some of the extra weight.
  9. Insurance

    4 Things That Keep You From Getting Life Insurance

    We look at four common reasons people give for not applying for life insurance, and see if they're legitimate.
  10. Financial Advisor

    Buying a Life Insurance Policy? Read This First

    Knowing who needs life insurance, how it works and the different types of insurance can help consumers make informed decisions about this product.
  1. How To Choose an Insurance Company?

    Knowing how to choose an insurance company is not an easy task, there are several factors you should consider, learn to make ... Read Answer >>
  2. Can an Insurance Company Deny Coverage?

    Insurance isn't always as straightforward as other products, and insurers can deny coverage in many different instances. ... Read Answer >>
  3. How does the insurance sector work?

    Learn more about the insurance sector, a historically safe place for equity investors and the home of some of the largest ... Read Answer >>
Trading Center