What Does Expected Loss Mean?
An expected loss is the sum of the values of all losses a company is statistically likely to incur. In general, expected losses are losses that are predicted to arise from loans or from a portfolio of assets with fluctuating or depreciating values.
Insurance companies calculate their expected losses in order to ensure their continued profitability.
Insuranceopedia Explains Expected Loss
An insurance company can calculate their expected loss by comparing their projected number of claims and the estimated value of those claims to the premiums they anticipate earning over the same period of time. The result of the comparison is the insurer’s expected loss ratio.
To continue to operate profitably, insurance companies need to have a healthy expected loss ratio. If the company is expecting a large loss but does not have enough earnings from premiums or investment vehicles to compensate for that loss, they risk going bankrupt or needing to file a claim with their reinsurer.