What defines incurred loss?

Incurred loss refers to the total amount of loss that an insurance company recognizes for its policies over a specified period. This includes not only the losses that have been paid out but also the losses that are expected to be paid in the future, which are typically reflected in reserves for open claims.

The correct answer encompasses both paid losses and the reserves established for open losses. Reserves are funds set aside for claims that have been reported but not yet settled. This means that incurred loss provides a more comprehensive picture of an insurer's liability than just considering paid losses alone.

In contrast, other options do not accurately define incurred loss. Simply focusing on paid losses would ignore an important consideration of future obligations that the insurer must meet. Random calculations of past claims do not provide the systematic approach necessary for understanding incurred losses, as they lack the structured consideration of reserves. Lastly, a projection of future claims does not account for the actual losses that have already been incurred, making it incomplete as a definition.

Therefore, the choice that combines both paid losses and reserves aligns with the industry's understanding of incurred loss.