Incurred losses
Total cost of claims attributable to a period: payments made plus reserves for claims not yet settled.
600,000 EUR paid, 150,000 EUR of reserves set up: incurred losses for the period come to 750,000 EUR, and that figure is the numerator of the loss ratio. Incurred losses measure the economic cost of claims attached to a period, of which the cash paid out is only a part. They add payments made, reserves for reported but unsettled claims, and reserves for incurred but not reported claims: payments plus the change in reserves. That accident-year basis stands against the paid basis, which is useless on a long-tail line, where a catastrophic accident year can show a low cost for three years. Most of the subjectivity in an insurance income statement runs through incurred losses. Payments are recorded, reserves are estimated, and the same book can show two incurred figures 10% apart depending on the reserving assumptions. So incurred losses are read alongside prior-year development, which says after the fact what the estimates were worth.
Textbook case: payments of 600,000 EUR + 150,000 EUR additional reserves = 750,000 EUR incurred losses, numerator of the loss ratio.
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