What are Loss Frequency and Loss Severity?
While modelling an operational risk, loss frequency and severity plays a critical role.
Loss frequency can be described by the average number of losses per year.
Loss severity can be described by the mean and standard deviation of losses when they occur.
Example of Loss Frequency and Loss Severity:
|Low||These risks are generally appropriately retained.
Example: Theft of shopping bags.
These risks are often appropriately retained.
|High||These risks are often appropriate for insurance.
|These risks are often appropriate for risk avoidance.
Example: Liability risk