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📊 '''Claim severity''' refers to the average monetary cost of individual claims within a given portfolio, line of business, or time period. Unlike [[Definition:Claim frequency | claim frequency]], which counts how often losses occur, severity measures how expensive each loss turns out to be. Insurers, [[Definition:Reinsurer | reinsurers]], and [[Definition:Actuary | actuaries]] track severity closely because even a stable frequency trend can mask a deteriorating book if the cost per claim is climbing — a pattern common in lines such as [[Definition:Commercial auto insurance | commercial auto]], [[Definition:Medical malpractice insurance | medical malpractice]], and [[Definition:Workers' compensation insurance | workers' compensation]].

⚙️ Severity is typically calculated by dividing total [[Definition:Incurred losses | incurred losses]] by the number of closed or reported claims over the same period. Analysts often segment the metric by [[Definition:Line of business | line of business]], geography, or [[Definition:Policy year | policy year]] to spot emerging trends. In [[Definition:Excess of loss reinsurance | excess-of-loss reinsurance]] arrangements, severity is the dominant risk factor: a treaty attaching at $500,000 is primarily exposed to the tail of the severity distribution rather than the volume of claims underneath that threshold. [[Definition:Catastrophe modeling | Catastrophe models]] also rely on severity assumptions to estimate per-event losses from natural disasters, feeding directly into [[Definition:Probable maximum loss (PML) | probable maximum loss]] calculations.

💡 Understanding severity dynamics is essential for accurate [[Definition:Loss reserving | loss reserving]] and [[Definition:Rate making | rate making]]. When severity trends outpace the [[Definition:Rate adequacy | rate adequacy]] assumptions baked into pricing, an insurer's [[Definition:Loss ratio (L/R) | loss ratio]] deteriorates — sometimes long before the problem surfaces in financial statements, because claims can take years to develop fully. Monitoring severity also helps [[Definition:Claims management | claims teams]] allocate resources: high-severity lines may justify dedicated specialist adjusters, [[Definition:Litigation management | litigation management]] programs, or [[Definition:Subrogation | subrogation]] efforts that would not be cost-effective on lower-severity portfolios.

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Claim frequency]]
* [[Definition:Incurred losses]]
* [[Definition:Loss ratio (L/R)]]
* [[Definition:Loss reserving]]
* [[Definition:Excess of loss reinsurance]]
* [[Definition:Catastrophe modeling]]
{{Div col end}}

Definition:Claim severity - Revision history

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