Cash paid out is only part of the story. Incurred loss is the total amount of loss attributable to a period, including both amounts already paid and amounts reserved for future payment on claims that occurred in that period. It is the comprehensive measure of loss cost.

Incurred losses equal paid losses plus the change in loss reserves. If reserves increase, incurred losses exceed paid losses; if reserves are released, the reverse occurs. Analysts use incurred losses to calculate accident-year and calendar-year loss ratios that measure underwriting performance.

Accurate incurred-loss figures depend on sound reserve estimates. Development of prior-year reserves can significantly affect current-period incurred losses. Management and regulators watch both the level and the stability of incurred-loss trends when assessing an insurer’s results.

• Paid losses plus change in reserves
• Measures total loss cost for a period
• Used in loss-ratio analysis
• Sensitive to reserve estimate changes