What Does Losses and Loss-Adjustment Expenses Mean?
Losses and loss-adjustment expenses refer to the share of the reserve fund that an insurance company sets aside to answer for unpaid losses and the attendant costs of investigating and adjusting these losses. Treated as a liability, it also comprises estimates of the losses for policies ceded to reinsurers.
Insuranceopedia Explains Losses and Loss-Adjustment Expenses
Insurance companies set aside a loss reserve to pay for future claims that may arise. The process of estimating potential losses requires actuarial calculations. As it is not 100% accurate, the amount set aside may not always be enough. As a portion of that fund, losses and loss-adjustment expenses specifically answer to covering unpaid losses and the costs of investigating them.
At the end of every year, insurers calculate the remaining amount by accounting for expenses incurred, expenses paid, investments, transfers, ceded reinsurance, and more to arrive at the net reserves for losses and loss adjustment expenses. They submit this information to insurance regulators who make sure the former are financially responsible.