What is 'Ultimate Net Loss'
A party's total financial obligation when an insured event occurs. The insured's ultimate net loss from costs such as property damage, medical expenses and legal fees will be offset by the portion of the loss that is paid by the insurance company (usually the amount of the claim that exceeds the insured's deductible, up to the policy maximum). Thus, the insured's loss will often be limited to the policy deductible unless the total loss exceeds the policy maximum.
An insurance company's ultimate net loss from a claim may be offset by the salvage value of any recoverable items, awards from successful claims against third parties, money from reinsurance and the policyholder's deductible and policy maximum. Ultimate net loss can be a generic term that refers to the total amount of any loss, but in finance it is most commonly used to refer to an insurance company's total loss from a policyholder's claim.
Explaining 'Ultimate Net Loss'
Insurance companies can protect themselves against large ultimate net losses by sharing policy risk with reinsurers. When an insurer shares a portion of the premiums it collects with a reinsurance company, it gains protection against a portion of its claims losses. For example, an insurance company might receive $30,000 in annual premiums for a $10 million policy. To protect itself against the threat of a $10 million loss, the insurance company might cede $15,000 of the annual premium to a reinsurer, who would agree to cover $5 million of the potential loss.
Q&A About Ultimate Net Loss
Why do companies go bankrupt?
Companies go bankrupt because they are not profitable enough to pay their debts.
If a business files for bankruptcy protection , what information must be provided on an official form called Schedule B ?
If a business files for bankruptcy protection , it must provide information on an official form called Schedule B .
On Schedule B , what does "Ultimate Net Loss" refer to ?
On Schedule B , "Ultimate Net Loss" refers to the amount of money that will be lost by creditors if the company goes bankrupt .
Who are creditors?
Creditors are people or organizations that loaned money to the business and expect to get paid back with interest.
Why would creditors want to know about ultimate net losses?
Creditors may want to know about ultimate net losses so they don't lend more money than they could possibly get back if the business goes bankrupt.
How much can a company lose in bankruptcy?
The most a company can lose in bankruptcy is its ultimate net loss.
What is Ultimate Net Loss?
Ultimate net loss is a party's total financial obligation when an insured event occurs.
Who pays the ultimate net loss?
The insurance company pays the ultimate net loss.
How does knowing about ultimate net losses help creditors make better decisions when lending money to businesses ?
Knowing about ultimate net losses helps creditors make better decisions when lending money because they know how much of their investment may be lost if the business goes bankrupt .
Does the insured pay the ultimate net loss?
No, the insured does not pay for their own ultimate net loss. They are covered by their policy and do not have to pay out of pocket for any losses they incur.
What does ultimate net loss represent?
Ultimate net loss represents the amount of money that will be lost by creditors if the company goes bankrupt.
What happens when a business cannot pay its debts ?
When a business cannot pay its debts , it files for bankruptcy protection .
What can be offset against an insurance company's ultimate net loss?
A portion of a claim that exceeds a deductible, up to a policy maximum can be offset against an insurance company's ultimate net loss. This means that if you have $10,000 in damages but your deductible is $5,000 then only $5,000 will count towards your insurer's ultimate net loss from your claim. However if you had no deductible or maximum on your policy then all of your damages would count towards your insurer's ultimate net loss from your claim.
How much money does it take to make up an insurance company's entire potential liability from one claim?
An insurance company has unlimited liability so there is no limit on how much money it could potentially lose from one claim but in practice this amount would be very large as most claims are less than 100% of the value of property damaged or destroyed and even fewer claims exceed 100% of medical expenses incurred by victims and legal fees paid out by victims' lawyers who win cases against negligent parties responsible for causing harm through negligence or other wrongful acts such as assault or battery (a tort). Insurance companies also share risk with reinsurers which limits their exposure to large losses because reinsurance contracts typically cap insurers' liabilities at around 10% - 15% of premiums collected annually so even if a catastrophic event occurred where 20%-30%+