Which of the following are the two types of retro plans?

The identification of incurred loss and paid loss as the two types of retro plans is rooted in the nature of insurance and risk management accounting.

Incurred loss refers to the total amount of claims that have been reported and are expected to be paid out by the insurer or self-insured entity, regardless of whether those claims have been settled or paid at the time of assessment. This encompasses both claims that have already been incurred and those that are not yet resolved, which can affect the future financial stability and requirements of the entity.

Paid loss, on the other hand, specifically represents the actual cash outflows that have occurred or are expected to occur for claims that have been settled. It reflects the tangible costs that an organization incurs in settling claims, providing a clear and measurable impact on cash flow and financial statements.

Understanding these classifications helps companies in managing their reserves and preparing for financial obligations stemming from their insurance operations, making it essential knowledge for professionals in risk management and accounting. This distinction is vital for formulating accurate financial strategies and ensuring compliance with regulatory reporting requirements, highlighting why incurred loss and paid loss are regarded as fundamental components in retro plans.