Expected Loss

What Does Expected Loss Mean?

An expected loss is the total of all losses a company is statistically likely to incur. Generally, expected losses are those predicted to arise from loans or a portfolio of assets with fluctuating or depreciating values.

Insurance companies calculate their expected losses to maintain profitability and financial stability.

Insuranceopedia Explains Expected Loss

An insurance company can calculate its expected loss by comparing the projected number of claims and their estimated values to the premiums anticipated over the same period. This comparison yields the insurer’s expected loss ratio. The same calculation sits behind how business insurance premiums are calculated on individual policies, since each customer’s premium has to cover the losses the insurer expects from that customer, plus operating expenses and a profit margin.

To operate profitably, insurance companies need a favorable expected loss ratio. If a company anticipates significant losses but lacks sufficient earnings from premiums or investments to cover them, it risks bankruptcy or may need to file a claim with its reinsurer. On the consumer side, expected losses are one of the main factors that affect car insurance rates: drivers in higher-risk groups carry higher expected losses, so they pay higher premiums.