Ground-Up Loss: What it is, How it Works

What Is Ground-Up Loss?

Ground-up loss is the total amount of loss that is covered by an insurance policy. Ground-up loss does not include deductibles paid by the insured, nor does it include liabilities ceded to a reinsurance company.

Understanding Ground-Up Loss

Insurance companies take a number of factors, including ground-up loss, into account when determining the total amount of coverage they are willing to extend to a policyholder when underwriting a new insurance policy.

The insurer’s baseline consideration is based on the ground-up loss, which represents the total loss that the insurer will have to cover if the insured does not have to pay a deductible and if the insurer does not cede any liability to a reinsurance company.

Insurers often offer policyholders a number of options when it comes to the balance between premiums and deductibles. Typically, the higher the deductible, the lower the premium, since a high deductible means that the insured is responsible for a greater portion of the loss before any insurance coverage is triggered.

The insurer considers the frequency and severity of claims relative to the premium it charges for coverage, including whether the deductible is calculated in aggregate or per occurrence. A high deductible may reduce loss exposure on small claims and thus warrant a lower premium, but a high severity claim may eclipse the value of the premium and result in losses.

To reduce liabilities, insurance companies may also use reinsurance. This allows the insurer to transfer some of its liabilities to a reinsurance company in exchange for a portion of its premium. If the insurer faces losses from a claim against a policy covered by a reinsurance agreement, the insurer can recoup some of the losses from the reinsurer. For the reinsurer, the ground-up loss represents the total amount of loss that it is liable for according to the reinsurance agreement it has made with the insurer.

Ground-Up Loss Analysis

The ground-up analysis estimates ground-up claim costs for a given cohort of claims, such as an accident year/product line component. It involves analyzing the exposure at an individual insured level and then estimating the ground-up losses for those insureds.

The total losses for the cohort are then the sum of the losses for each individual insured. In practice, the method is sometimes simplified by performing the individual insured analysis only for the larger insureds, with the costs for the smaller insureds estimated via sampling approaches (extrapolated to the rest of the smaller insured population) or aggregate approaches (using assumptions consistent with the ground-up larger insured analysis).

Ground-Up, Gross, Net, and Final Net Losses

A ground-up loss is a loss to the policyholder or insured person before insurance; gross loss typically refers to the claim made to the insurer; net loss usually refers to gross loss net of reinsurance; final net loss typically refers to the gross loss net of reinsurance and reinstatements.