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Loss Frequency and Loss Severity

The frequency of claims is the number of claims an insurer expects to occur over a period of time, while the severity is cost of a claim.

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:

Loss Frequency

  Low High
Low These risks are generally appropriately retained.
Example: Theft of shopping bags.

These risks are often appropriately retained.
Example: shoplifting.

High These risks are often appropriate for insurance.
Example: fire
These risks are often appropriate for risk avoidance.
Example: Liability risk

 

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