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Loss Development

Loss Development

Definition

The difference between the original loss as initially reserved by an insurer and its subsequent evaluation later or at the time of its final disposal. 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.

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