In insurance, losses depend primarily on which two variables?

The understanding of how losses occur in the context of insurance revolves around two essential concepts: frequency of loss and severity of loss. Frequency of loss refers to how often a loss event takes place within a specific timeframe. This could relate to how often a particular type of claim is made, such as claims from natural disasters, theft, or liability incidents.

Severity of loss, on the other hand, deals with the financial impact or the cost associated with the losses that do occur. This can indicate how much money the insurer would likely pay out when a claim is filed. High frequency but low severity might suggest manageable risks, while low frequency but high severity could indicate that potentially catastrophic losses are possible.

Together, understanding both the frequency and the severity allows insurers to assess risks more effectively, set premium rates, and develop policies that protect both themselves and their policyholders. This dual focus informs actuarial trends and underwriting decisions, shaping how insurance products are designed and priced. Therefore, the relationship between these two variables is fundamental in determining the overall risk and potential losses for an insurance provider.