Losses And Loss-Adjustment Expenses

What Does Losses And Loss-Adjustment Expenses Mean?

Losses and loss-adjustment expenses refer to the portion of the reserve fund that an insurance company allocates to cover unpaid losses and the associated costs of investigating and adjusting those losses. Treated as a liability, this fund also includes estimates of losses for policies ceded to reinsurers.

Insuranceopedia Explains Losses And Loss-Adjustment Expenses

Insurance companies set aside a loss reserve to cover future claims that may arise. Estimating potential losses involves actuarial calculations, which, while informative, are not 100% accurate; therefore, the amount reserved may not always be sufficient. Losses and loss-adjustment expenses specifically address covering unpaid losses and the costs associated with investigating them.

At the end of each year, insurers calculate the remaining amount by accounting for incurred expenses, paid expenses, investments, transfers, ceded reinsurance, and other factors to arrive at the net reserves for losses and loss adjustment expenses. This information is submitted to insurance regulators, who ensure that insurers remain financially responsible.