01 / The meaning
What it means.
Average severity is often calculated by dividing total relevant loss costs by the number of losses, but the chosen data matters. Paid claims exclude unresolved amounts, while incurred figures include estimates. A few expensive incidents can dominate an average. Looking at the largest loss, the range of costs and common causes often gives a business more useful context.
Severity helps frame decisions about limits, emergency planning and how much risk the business can retain. A low incident rate should not obscure a possible fire, serious injury or major professional allegation. Similarly, reducing numerous minor losses may not reduce exposure to an exceptional event. Compare scenarios that reflect the actual assets, activities and concentrations in the business.
02 / Put it in context
A practical example.
Hypothetical example: A warehouse records several minor handling losses and one large fire. Its average claim cost rises sharply because of the fire. Management examines both everyday handling controls and the concentration of stock, rather than treating the average as the expected cost of every future claim.
This example illustrates the term. It does not predict a claim outcome.
03 / Read the detail
What to check.
- Check whether costs include reserves, recovery amounts and expenses.
- Review the largest losses separately from the average.
- Compare plausible severe events with limits and available cash.
04 / Start a useful conversation
A question for your broker.
What could make one incident substantially larger than our usual losses?
05 / Connect the terms
Keep the meaning in context.
06 / Apply it to your business
Related insurance guides.
Further reading
Read the source guidance alongside the relevant policy wording.
General information only. This does not take into account your objectives, financial situation or needs. Before acting, consider whether the information is appropriate for you. Cover is subject to insurer acceptance and the policy terms, conditions, limits and exclusions. Read the Financial Services Guide and the relevant PDS (where applicable) and/or policy wording before deciding.
Let’s start with your business
A clearer conversation
about your insurance.
Tell us what you do, what has changed and what you need to understand.