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📊 '''Severity''' refers to the magnitude of a single [[Definition:Loss | loss]] or [[Definition:Claim | claim]] in insurance, measuring how costly an individual event turns out to be rather than how often events occur. While [[Definition:Frequency | frequency]] tracks how many claims arise within a given period, severity captures the dollar amount per claim — a distinction that sits at the heart of [[Definition:Actuarial science | actuarial analysis]] and [[Definition:Underwriting | underwriting]] strategy. A book of business with low frequency but high severity, such as [[Definition:Catastrophe insurance | catastrophe]] or [[Definition:Directors and officers liability insurance (D&O) | directors and officers]] coverage, demands very different [[Definition:Reserving | reserving]] and [[Definition:Pricing | pricing]] approaches than a high-frequency, low-severity portfolio like standard [[Definition:Auto insurance | auto insurance]].

⚙️ Insurers and [[Definition:Reinsurer | reinsurers]] analyze severity by examining historical [[Definition:Claims data | claims data]], segmenting losses by line of business, geography, and peril type. [[Definition:Actuary | Actuaries]] fit statistical distributions — such as lognormal or Pareto curves — to past loss amounts, then project future severity trends after adjusting for [[Definition:Inflation | inflation]], legal environment changes, and shifts in [[Definition:Exposure | exposure]]. These severity models feed directly into [[Definition:Loss ratio (L/R) | loss ratio]] projections, [[Definition:Experience rating | experience rating]] calculations, and the structuring of [[Definition:Excess of loss reinsurance | excess-of-loss reinsurance]] layers, where attachment points are explicitly set based on expected severity thresholds.

💡 Understanding severity trends can make or break an insurer's profitability. Rising claim severity — driven by factors like [[Definition:Social inflation | social inflation]], increasing medical costs, or more expensive property replacements — can erode margins even when claim counts hold steady. For [[Definition:Reinsurance | reinsurance]] buyers, severity analysis determines how much protection to purchase and where to place layer boundaries. Ignoring a creeping upward shift in severity is one of the most common reasons [[Definition:Underwriting cycle | underwriting cycles]] turn unprofitable, making this metric a critical watchpoint for [[Definition:Chief underwriting officer (CUO) | chief underwriting officers]] and [[Definition:Portfolio management | portfolio managers]] alike.

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Frequency]]
* [[Definition:Loss ratio (L/R)]]
* [[Definition:Actuarial science]]
* [[Definition:Excess of loss reinsurance]]
* [[Definition:Social inflation]]
* [[Definition:Reserving]]
{{Div col end}}

Definition:Severity - Revision history

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