What is paid loss premium based on?

Paid loss premium is calculated based on losses that have already been paid. This means it refers specifically to the actual outflow of cash for claims that have been settled and for which the insurer has disbursed funds. Since the paid loss premium is rooted in real, confirmed transactions rather than projections or estimates, it provides a clear picture of the historical losses incurred by the insurance provider.

In contrast, options that involve estimations, projections, or reserves reflect different aspects of loss analysis. For example, estimating future claims and projecting losses for the upcoming year rely on guesswork and statistical models rather than on settled claims, which directly influences premium calculations in a way that is less tangible than the actual paid losses. Open claims with reserves represent potential future payouts but do not represent cash disbursements yet. The focus on actual, paid claims makes the calculation of the paid loss premium straightforward and tied to predictable financial outflows, aligning directly with the insurer's historical performance related to paid claims.