Severity
Average cost per claim. With frequency, it is one of the two drivers of pure premium, and it is highly sensitive to inflation.
Panjer, 1981, ASTIN Bulletin: a recursion yields the aggregate loss distribution from the claim count distribution and the claim size distribution, so severity enters through its whole distribution. In practice, severity is the average cost per claim, total incurred losses divided by claim count. Multiplied by frequency, it gives the pure premium. It soaks up inflation in materials, labor and medical costs, and extreme claims push it up. That is why the whole distribution is tracked, since a stable average can hide a drift in the tail. Large losses are typically capped and handled separately so extreme values don't distort pricing for the attritional layers.
Worked example: 3,600,000 EUR of total losses over 1,200 claims gives a severity of 3,000 EUR. Capping a single 500,000 EUR loss at 150,000 EUR keeps it from skewing attritional severity.
Follow the research
One letter a week. First, the week's underwriting note, when one is published: a dated, argued decision, signed by Paul Bernardski. Then what the observatory published on cyber risk, political risk and insurance. No account, no tracking.
No spam, one-click unsubscribe, no data ever sold.