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📈 '''Loss severity''' measures the average dollar amount paid per [[Definition:Claim | claim]] within a given [[Definition:Line of business | line of business]], portfolio, or time period, and it stands alongside [[Definition:Loss frequency | loss frequency]] as one of the two fundamental dimensions insurers use to characterize [[Definition:Loss experience | loss experience]]. While frequency tells a carrier how often losses occur, severity reveals how costly each individual event tends to be. Together, these metrics drive virtually every aspect of [[Definition:Underwriting | underwriting]], [[Definition:Pricing | pricing]], and [[Definition:Reinsurance | reinsurance]] strategy.

📐 Actuaries and underwriters calculate severity by dividing total [[Definition:Incurred loss | incurred losses]] by the number of claims in a defined segment. The metric can be sliced by coverage type, [[Definition:Policy period | policy period]], geography, or any other dimension relevant to portfolio analysis. Severity distributions tend to be right-skewed — most claims cluster at lower values, but a thin tail of large losses can dramatically shift the average. To account for this, analysts often examine severity at various percentiles and model extreme outcomes using statistical distributions such as Pareto or lognormal curves, which feed into [[Definition:Catastrophe model | catastrophe models]] and [[Definition:Excess of loss reinsurance | excess-of-loss reinsurance]] structures.

🔍 Monitoring severity trends gives carriers early warning of shifts that could erode profitability before traditional [[Definition:Loss ratio (L/R) | loss ratio]] metrics fully reflect the change. Rising severity in [[Definition:Auto insurance | auto insurance]] bodily injury claims, for example, may signal increasing [[Definition:Medical cost inflation | medical cost inflation]] or shifts in [[Definition:Litigation | litigation]] patterns — intelligence that allows underwriters to adjust [[Definition:Rate | rates]] proactively. In [[Definition:Commercial insurance | commercial lines]], a sudden spike in average claim size within a [[Definition:Professional liability insurance | professional liability]] book might prompt a review of [[Definition:Policy limit | policy limits]] and [[Definition:Attachment point | attachment points]]. Because severity directly influences [[Definition:Loss reserves | reserve adequacy]] and [[Definition:Capital allocation | capital allocation]], it remains one of the most closely tracked indicators in any insurer's analytical toolkit.

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

Definition:Loss severity - Revision history

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