The formula to calculate Losses incurred for the accounting period is:

Question

Options

• AIncurred losses = (Losses paid to date) / (Loss reserve prior period) + (loss reserve final period)
• BIncurred losses = (Losses paid to date) _ (Loss reserve prior period) + (loss reserve current period)
• CIncurred losses = (Annual Losses) _ (Losses paid to date) + (loss reserve current period)
• DIncurred losses = (Losses paid to date) + (Loss reserve prior period) _ (loss reserve current period)

• A
  7% (2)
• B
  71% (20)
• C
  18% (5)
• D
  4% (1)

Explanation

Option B correctly captures how insurers measure the true cost of losses during an accounting period: Incurred = Paid + (Current Reserve − Prior Reserve). Since the "_" in the choices represents subtraction, B reads as paid losses minus the prior reserve plus the current reserve - which is algebraically equivalent to paid losses plus the change in reserves. This reflects economic reality: you've paid some claims already, and the net shift in your reserve balance tells you how much more you expect to pay.

Why the distractors fail:

• A uses division (/) between paid losses and the prior reserve, which has no logical basis in loss development math.
• C starts with Annual Losses minus paid losses, inverting the relationship - that would give you remaining unpaid losses, not incurred losses for the period.
• D adds the prior reserve and subtracts the current reserve, which reverses the direction of the reserve change - it would understate incurred losses when reserves are growing (the typical direction).

Memory tip: Think "Paid + Change in Reserve" → the change is always Current minus Prior. A growing reserve means more losses are being recognized; a shrinking reserve means fewer. Option B is the only one where subtracting Prior and adding Current gives you that forward-looking change.

No community discussion yet for this question.