Severity (Insurance)

Example

“The auto insurance company noticed that while accident frequency decreased last year, claim severity increased by 12% due to rising vehicle repair costs and medical expenses.”

Memory Tip

Think 'severe damage = severe cost' - severity measures how severe (expensive) each claim is when it happens, not how often claims happen.

Why It Matters

Understanding severity helps insurers price policies accurately and helps consumers understand why premiums increase even when claim frequency stays the same. Rising severity in areas like auto repair costs or medical expenses directly impacts what everyone pays for insurance.

Common Misconception

Many people confuse severity with frequency, thinking severity means how often claims occur rather than how expensive they are. Others assume lower frequency always means lower costs, not realizing that even rare claims can be extremely expensive and drive up premiums.

In Practice

An auto insurer analyzed 10,000 collision claims last year with total payouts of $25 million, calculating an average severity of $2,500 per claim. This year, they had only 9,000 claims (lower frequency) but total payouts of $27 million, increasing severity to $3,000 per claim - a 20% increase. Despite fewer accidents, the higher severity due to expensive car technology and parts led to a 8% premium increase across their customer base. A single severe claim, like a $150,000 luxury car total loss, can significantly impact the overall severity calculation and affect rates for all policyholders in that risk class.

Etymology

From the Latin 'severus' meaning 'serious' or 'grave,' the term entered insurance usage in the mid-20th century to quantify the seriousness of losses in monetary terms, distinguishing it from how often losses occur.

Common Misspellings

Related Terms

More in insurance

Other insurance terms you should know

See Also