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📊 '''Severity trend''' refers to the directional movement over time in the average cost per [[Definition:Claim | claim]] within a given [[Definition:Line of business | line of business]] or portfolio, and it is one of the two fundamental trend components — alongside [[Definition:Frequency trend | frequency trend]] — that [[Definition:Actuary | actuaries]] and [[Definition:Underwriting | underwriters]] analyze when projecting future [[Definition:Loss | losses]]. In insurance, monitoring severity trend is essential because even if the number of claims remains stable, rising average claim costs can erode [[Definition:Underwriting profit | underwriting profitability]] and render current [[Definition:Premium | premium]] levels inadequate. The concept applies across all major classes — from [[Definition:Property insurance | property]] and [[Definition:Motor insurance | motor]] to [[Definition:Liability insurance | liability]] and [[Definition:Workers' compensation insurance | workers' compensation]] — though the drivers of severity differ markedly by line and geography.

⚙️ Actuaries estimate severity trend by examining historical [[Definition:Loss development | loss-development]] triangles, adjusting past claim amounts to a common cost level, and fitting statistical models to isolate the rate of change. In [[Definition:Property insurance | property lines]], severity trend often tracks construction-cost indices, supply-chain disruptions, and the increasing value of insured assets. In [[Definition:Motor insurance | motor insurance]], it reflects vehicle-repair technology costs and medical-expense inflation. [[Definition:Liability insurance | Liability lines]] are subject to what some markets term "social inflation" — the tendency for jury verdicts and settlement demands to grow faster than general economic inflation, a phenomenon most visible in the United States but increasingly discussed in other [[Definition:Jurisdiction | jurisdictions]]. Under both [[Definition:US GAAP | US GAAP]] and [[Definition:IFRS 17 | IFRS 17]] reserving frameworks, selected severity trends directly influence the [[Definition:Reserve | reserves]] an insurer posts on its balance sheet and the [[Definition:Rate filing | rate indications]] used to justify [[Definition:Premium | premium]] changes to regulators.

💡 Underestimating severity trend is one of the most reliable paths to [[Definition:Reserve deficiency | reserve deficiency]] and pricing inadequacy. If an insurer selects a three-percent annual severity trend but the true trend is running at six percent, losses will consistently outpace expectations, compressing [[Definition:Combined ratio | combined ratios]] and potentially threatening [[Definition:Solvency | solvency]] over multiple accident years. [[Definition:Reinsurance | Reinsurers]] pay close attention to severity trends when pricing [[Definition:Excess of loss reinsurance | excess-of-loss treaties]], because higher-severity environments push more individual losses into excess layers. Advanced [[Definition:Insurtech | insurtech]] analytics and external data enrichment are now enabling more granular severity-trend segmentation — by peril, geography, and even claimant demographics — helping carriers identify trend shifts earlier and respond with timelier [[Definition:Rate adequacy | rate adjustments]].

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Frequency trend]]
* [[Definition:Loss development]]
* [[Definition:Reserve]]
* [[Definition:Combined ratio]]
* [[Definition:Rate adequacy]]
* [[Definition:Social inflation]]
{{Div col end}}

Definition:Severity trend - Revision history

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