[[Actuarial Notes Wiki|Wiki]] / [[Exam 5 (CAS)]] / **Severity Analysis** ## Definition ==Severity Analysis== is the examination of average claim costs (total losses divided by claim counts) to understand trends in claim size and identify changes in the cost per claim. ## Formula ``` Average Severity = Total Incurred Losses / Number of Claims Can analyze: - By accident year - By development age - By coverage type - By geography ``` ## Uses ### Trend Analysis ``` Track severity changes over time: - Medical cost inflation - Wage inflation - Social inflation - Coverage limits impact Annual Severity Trend = (Current Severity / Prior Severity)^(1/years) - 1 ``` ### Reserve Testing ``` Projected Ultimate Severity × Projected Ultimate Counts = Ultimate Losses Consistency check: - Do severity trends match expectations? - Are counts developing reasonably? - Does product match total loss estimates? ``` ## Example ``` Auto Bodily Injury Analysis: AY Claims Losses Avg Severity 2021 1,000 $5,000,000 $5,000 2022 1,050 $5,775,000 $5,500 2023 1,100 $6,600,000 $6,000 Severity trend: = ($6,000 / $5,000)^(1/2) - 1 = 1.0954 - 1 = 9.5% annually ``` ## Factors Affecting Severity ### Inflation - Medical costs - Repair costs - Wage inflation - General price levels ### Social/Legal - Jury awards increasing - Attorney involvement - Regulatory changes - Coverage interpretations ### Mix of Business - Higher/lower limits - Different territories - Industry changes - Exposure mix ## Related Concepts - [[Frequency Analysis#Definition]] - [[Frequency-Severity Method#Definition]] - [[Loss Trend#Definition]] ## References - Friedland, Chapter 8 - Werner & Modlin, Chapter 8