What Does Loss Development Factor Mean?
Loss development factors are variables that are used for calculating the total amount of money that insurance companies will have to pay out in claims for a given period of time. They are needed because claims are often reported after a "loss development" period expires, meaning the amount of claims that have to be paid out is likely significantly higher than the current claims reported at the end of a loss development period such as a year.
Insuranceopedia Explains Loss Development Factor
To understand how loss development factors work, imagine that a company has a loss development factor of 1.4. This means that $1.4 dollars will ultimately have to be paid out for every $1 reported in a loss development period because more claims will be reported later. So, if the insurer's loss development factor is 1.4, and if it experiences $100,000 in current claims filed, then when the loss development factor is applied, the insurance company knows that it will more likely have to pay out $140,000 in claims (100,000 × 1.4).