Most of the "permanent losses" are because the passenger gives up or doesn't care terribly much - hence all the luggage at the airline outlet stores.
Most airlines do eventually find the bag, and if you kept in touch they'll usually even get it to where you are, even if you've since returned.
I honestly have no idea how those dynamics work. At some point, the airline presumably pays, travel insurance does, or a combination of the two. At some point if it's just a bunch of old travel stuff, I guess I can see a customer shrugging, collecting the money, and dropping the whole thing.
I'm now imagining a situation in which a customer at the point of successfully making an insurance claim to pay for the nice new clothes they've bought themselves is infuriated to receive an email informing them that Kansai airport has found their luggage and will endeavour to deliver it to a hotel anywhere within the world within two days...
The customer has presumably been paid. If they're smart there's nothing or very little in the suitcase that can't just be replaced. The airline/insurance has paid out and just wants the claim to go away.
As a side-note, had a small kitchen fire with smoke damage last year and it was pretty obvious that, even though they were reasonably generous, the insurance adjuster, cleaning people, movers, etc. just wanted the whole process to go away so they could move on. They objected a bit to a few claims but, for the most part, spending $50K was nothing compared to the claims being reopened.
Once the insurance adjuster is satisfied that you're not scamming them, they're often quite flexible and lenient.
I've only ever had luggage delayed once, they gave me a little bag of toiletries and a couple hundred bucks and a few days later delivered the luggage; never demanded the money back.
I've had luggage delayed many times relative to the amount I actually check luggage.
There were a few insurance policy things that my adjuster pushed back on (no code upgrades) and there were a number of things that would have just been silly for me not to pay for when walls were being repaintedd and opened up. There was a fire inspector because of the size of the claim. But it was pretty reasonable overall--although of people wouldn't have had the available cash to do the whole job as it really needed o be done. And, given that a couple of contractors, saved my butt in the middle of the winter, I wasn't going to push back too hard.