Also known as: claims severity · loss severity · average cost per claim
How expensive claims are, measured as the average cost per claim over a set period.
Claim severity is total incurred loss divided by the number of claims, giving the average cost of a claim. 'Incurred' matters: it includes amounts already paid plus the reserves still held open for a claim, so severity on a recent year can climb as reserves develop. Severity is the second half of the pricing formula, multiplied by claim frequency to produce loss cost. Low frequency with high severity is the classic profile for professional, cyber, and D&O exposures, where a startup might go years without a claim and then face one that runs into seven figures. That shape is a limits question rather than a process question, which is why severity-driven lines are where your policy limit, sublimits, and excess layers matter most.
Divide total incurred loss by the number of claims over the same period. If five claims produced $400,000 of incurred loss, average severity is $80,000. Incurred loss includes both payments made and reserves still set aside on open claims, so the figure for a recent year is an estimate that moves as those claims close.
Neither is automatically worse, but they call for different responses. High frequency is usually a controls problem you can fix with process and training. High severity is a balance-sheet problem: one claim can exceed your entire limit, so it is addressed by buying adequate limits and excess coverage. Startups in professional, cyber, and D&O lines typically face the low-frequency, high-severity shape.
Definitions are educational and may be modified by your specific policy language, endorsements, and state rules. For regulatory guidance, refer to the California Department of Insurance or the NAIC.
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