Property and Casualty Insurance Practice Exam

Which statement accurately describes incurred losses?

1. They only include claim payments.

2. They encompass payments and handling expenses for claims.

3. They include unprocessed claims only.

4. They consist of policyholder reserves.

The correct answer is: They encompass payments and handling expenses for claims.

Incurred losses represent the total costs that an insurance company expects to pay regarding claims during a specific period. This includes not just the actual payments made for claims but also the associated handling expenses, such as the administrative costs of processing those claims, investigative fees, and legal expenses if litigation arises. By encompassing both claim payments and handling expenses, this definition captures the full financial impact of claims on an insurer's balance sheet. This understanding is crucial for assessing an insurer’s financial health, setting premiums, and developing strategies for risk management. The other options do not fully represent the comprehensive nature of incurred losses. For example, focusing solely on claim payments would omit significant costs associated with managing those claims. Similarly, considering only unprocessed claims or solely reserves does not reflect the entirety of the incurred losses, leaving important financial aspects unaccounted for.