I've not played Mass Effect 1 or 2, and during character creation in Mass Effect 3 I'm asked to choose what experience of combat loss I have. This makes little sense to me, I don't know who the people mentioned are. What difference does it make to the game?
Several decisions made during Mass Effect 1 and 2 have outcomes that affect the story in Mass Effect 3 -- in particular, it's entirely possible to finish Mass Effect 2 while losing almost your entire crew, including your party members.
This Mass Effect Wiki page contains a complete summary - or at least, we think it's mostly complete.
The "combat loss" it's alluding to is a shorthand way of asking whether you want a fabricated ME1/ME2 backstory where none, some, most or all of your crew survived.
It'll still assume suboptimal outcomes for various side missions and/or DLC that you never played, though; the only way to get those is to play through ME1 and ME2 yourself and complete them.