loss development

Loss development describes how a claim changes from the original loss reserved by the insurer until the claim is closed. Loss development can be significant on long-tail lines of coverage where there tends to be a lag between the reporting and payment of claims, such as workers compensation and liability claims.

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Loss development occurs because of (1) inflation—both "social inflation" and inflation in the consumer price index—during the period in which losses are reported and ultimately settled and (2) time lags between the occurrence of claims and the time they are actually reported to an insurer. To account for these increases, a "loss development factor" (LDF) or multiplier is usually applied to a claim or group of claims in an effort to more accurately project the ultimate amount for which they will be closed.


Related Terms

A loss development factor (LDF) is used to adjust losses to account for the general upward trend in...