“Frequency leads to severity” is one of the first axioms taught in the property and casualty insurance industry.
Underwriters review historical loss data on each risk, current customers, and potential new customers; loss frequency is one of the most important lenses they use to determine risk acceptability and pricing.
Let’s compare the five-year loss-runs of two customers. The first loss run shows that the customer has one loss per year, each in the $2,000 to $10,000 range; the total for the five years is $25,000. The second loss runs show only one loss for a total of $50,000.
Which do you suppose is seen as a better risk? Even though the amount paid for the five years is higher on the one-loss customer, an underwriter generally sees the frequency customer as the riskier of the two. That will reflect in the pricing offered, all other things being equal.
What are the antidotes to frequency?
- Higher deductibles—more “skin in the game” shows the underwriter you are committed to controlling losses
- Upgraded security protection to prevent losses
- Employee training in safe work practices to prevent losses
- Protective equipment to control the effects of accidents
We recommend an added “Rule of Thumb” for filing a claim. Don’t file a claim for any amount below two times your deductible. Your risk management program is better served by paying the small frequency losses out of pocket.