Hawaii Insurance Adjuster License Practice Exam

In rate making, "developed losses" include which of the following?

1. Projected future losses

2. Only incurred losses

3. Losses including loss adjustment expenses

4. Losses covered under policy limits

The correct answer is: Losses including loss adjustment expenses

In rate making, "developed losses" refer to the total losses that an insurer anticipates or has already recognized from an insurance claim. This concept includes losses that have already been incurred and those that may arise as the claims process progresses, which can encompass all amounts that are potentially applicable to settle claims, including loss adjustment expenses. Selecting losses that include loss adjustment expenses is crucial because these costs can significantly impact the overall financial outcome of each claim. They represent the funds necessary to effectively handle and settle claims, thereby providing a more complete picture of the insurer’s liabilities when determining appropriate rates. Projecting future losses, while important for understanding overall risk, does not fall under developed losses, as these are estimates rather than recognized amounts. Likewise, focusing only on incurred losses neglects the additional responsibilities and costs associated with processing those claims. Losses covered under policy limits represent just the maximum payout associated with a claim, excluding other expenses. Therefore, developed losses are best defined by their inclusion of all relevant costs, which makes the inclusion of loss adjustment expenses essential.