Law of Large Numbers

A tool used in probability and statistics. The larger the number of units independently exposed to loss, the more accurate the ability to predict loss results arising from those exposure units.

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Layer

A horizontal segment of the liability insured.

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Letter of Credit

A legal commitment issued by a bank or other entity stating that, upon receipt of certain documents, the bank will pay against drafts meeting the terms of the letter of credit. Letters of credit are frequently used for risk financing purposes to collateralize monies owed by an insured under various cash flow programs such as incurred but not paid losses in a paid loss retrospective rating program. “LOCs” also provide a means of meeting capitalization requirements of captives, and are used to satisfy the security requirements in “fronted” deductible or retention programs.

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Loss Adjustment Expense

The cost of investigating and adjusting losses. Such expenses may be termed “allocated loss adjustment expenses (ALAE)” or unallocated loss adjustment expenses.

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Loss Development

The difference between the original loss as first reported to an insurer and its subsequent evaluation at a later date or at the time of its final disposal.

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Loss Event

The total losses to the ceding company or to the reinsurer resulting from a single cause.

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Loss Forecasting

Predicting future losses through an analysis of past losses.

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Loss Portfolio Transfer

A financial reinsurance transaction in which loss obligations that are already incurred and will ultimately be paid are ceded to a reinsurer.

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Loss Ratio

Proportionate relationship of incurred losses to earned premiums expressed as a percentage. If, for example, a firm pays a $100,000 annual premium for worker’s compensation insurance, and its insurer pays and reserves $50,000 in claims, its loss ratio is 50 percent ($50,000/$100,000).

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Loss Reserve

An estimate of the value of a claim or group of claims not yet paid. A case reserve is an estimate of the amount for which a particular claim will ultimately be settled or adjudicated. An insurer will also set reserves for its entire books of business to estimate its future liabilities.

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Loss Trending

One step in the process of predicting future losses, through an analysis of past losses.

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