A loss development factor is a ratio used in claims reserving to project the claims an insurer knows about today to their expected final amount. Claims for any period grow as time passes, because late claims are reported and estimates on open claims are revised. The factor measures that growth. If claims for past accident years stood on average at 1,000 after twelve months and 1,500 after twenty-four months, the age-to-age factor from twelve to twenty-four months is 1.5.
Factors are calculated from the historical data set out in claims triangulation. Multiplying together the successive age-to-age factors from a given age to the end of development gives a cumulative factor, which is applied to the latest figure for a recent period to estimate its ultimate cost. A tail factor covers development beyond the oldest data. The projected ultimate less claims already recorded is the estimate of incurred but not reported claims.