An actual loss definition is the full amount of money an insurance company will pay for a claim, based on the actual costs or expenses the person filing experienced. In the insurance world, actual loss can refer to:

• All the costs paid by the insurance company in the final loss settlement, including payments on your behalf.
• How much you lost because of the claim.

The total actual loss can only be calculated once the insurance company has assessed and processed the claim.

## What Counts Towards the Actual Loss?

If you file a claim with your insurance company, the actual loss total will include a number of things:

• Debris removal.
• Repair costs.
• Item storage.
• Contractor or specialist costs.

Another example of costs that can count toward the actual loss is gas mileage. For example, if your home is damaged by a freak storm and needs to be rebuilt, you'll need accommodations somewhere else. This might create a longer drive to work or school.

You can add this extra mileage to the actual loss. You'll just need to subtract what you used to spend on gas when you lived in your home from what you're spending on gas money now. Note that you can't just add on all the mileage you're driving into the actual loss, as your insurance won't reimburse you for miles you would have driven anyway.

You won't receive one big check for all these actual loss expenses. Rather, the insurance company will make payments on your behalf, often without informing you. For example, if you receive a \$20,000 claims settlement, the insurer might also have paid the people making repairs to your home after an accident. Because of this, the actual loss could be much higher.

The costs of repairs are also an important factor to consider. When having a contractor rebuild your destroyed house, they might quote a projected cost that ends up being higher than what they actually spent. Your insurance company will not pay the higher projected cost; rather, they will just pay exactly what the contractor spent to rebuild your home.

## An Example of an Actual Loss Calculation

A married couple named Jim and Sue own a house which is hit by a windstorm. This rips some shingles off their roof, causing water to leak in. While the damage isn't too bad, they still need to live in a hotel while contractors make repairs.

Jim and Sue have a homeowner's insurance policy that covers the costs of them living in a hotel for a week as well as the additional costs of living associated with this displacement. After the week is up and the couple can move back home, they submit the bills for their hotel and food costs for the time they were displaced.

While the insurance company covered the hotel at 100 percent, they only covered their food bills at 75 percent. This is because the amount Jim and Sue typically spend on food for a week was subtracted from their food bills. In a typical week, Jim and Sue spend \$100 on food. During their week in the hotel, they had to eat out for every meal and spent \$400.

Therefore, the insurance company subtracted their typical \$100 weekly meal costs from the \$400 and ended up only reimbursing them the additional \$300. This \$300 is the actual loss for food costs for this displacement.

## What Is Loss Ratio?

Another important concept that relates to actual loss is loss ratio. This is the ratio of losses paid to a person by an insurance company versus what they pay in premiums. It is calculated as a percentage using a specific formula:

• Loss ratio = (Benefits paid + Adjustment expenses) ÷ Premiums paid

Take an example of an insurance company that collects \$10,000,000 in premiums over the course of a year. If they end up paying out \$8,000,000 in benefits and adjustments during this year, then they have a loss ratio of 80 percent.

In the past, the loss ratio of an insurance company was used to determine its financial health. If a company had a high loss ratio, it meant they weren't making a good profit. However, this view has changed because of the difficulty of properly calculating the loss ratio for various insurers and providers.

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