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Insurance Claims: Frequency vs. Severity

June 7th, 2024 | 3 min read

By Daniel J. Middleton

Insurance claims - frequency vs severity

When it comes to protecting your livelihood, making informed decisions about insurance is crucial. Many people find themselves worrying about buying a policy that doesn't quite fit their unique situation. They're concerned about navigating the complexities of insurance without truly understanding how it works.

At Horan, we understand these challenges. As an independent Central New York agency working with multiple carriers, we have the informed perspective needed to guide you toward the right coverage.

In this article, we'll dive into a key aspect of insurance that often leads to confusion: the impact of claim frequency versus severity on your policy.

By reading to the end, you'll have a clearer understanding about the differences between having multiple claims vs. one really big one. Let's explore how insurance companies view claims and empower you to make confident decisions for your future.

How Insurance Companies View Risk

Insurance companies assess risk based on two key factors:

  1. claim frequency and
  2. claim severity.

Frequency refers to how often claims are filed, while severity refers to the financial impact of each claim.

Ideally, policyholders should aim to minimize both frequency and severity. Infrequent, low-cost claims are the most favorable from an insurer's perspective. High-severity claims, while costly, can be insurable if they occur rarely. However, a high frequency of claims, even if they're low in severity, can lead to higher premiums or difficulty obtaining coverage.

By understanding how insurers view risk, you as a policyholder can make informed decisions about your coverage and claims strategy. Working closely with an insurance agent to review claim history and identify potential risk areas is crucial for maintaining a strong risk profile and ensuring access to competitive rates and extensive coverage.

The Unwritten Rule of Insurance

Frequency of small insurance claims vs. a single high-severity one.A high frequency of small insurance claims can have a longer-lasting negative impact than a single high-severity one. It's an unwritten rule in the insurance industry: the fewer claims, the higher the likelihood of having the policy renewed. It can be challenging to square this philosophy with the mindset of “That's what insurance is for!”

There's nothing wrong with expecting that a covered loss will result in a paid claim. The general point of an insurance policy is to make the policyholder whole again.

If a fire breaks out in a home in Lysander, let’s say, the loss will be claimed on the policyholders homeowners insurance. And if a car gets mangled in an accident on I-690, that will be called in for the auto policy too. Of course, those are serious examples, but what about the less serious ones?

This refers to the claims that don't amount to much more than the deductible. Over time, those filed claims could cost you more than the expense of the losses themselves. When it comes to insurance, the frequency of claims matters just as much as their severity, and understanding this unwritten rule is key to maintaining continuous insurance and securing the best coverage for your needs.

The 5-Year Review Period for Most Carriers

On average, insurance carriers review the last 5 years of claims history when determining what to charge or if they even want to offer a policy. The more claims filed over those five years will significantly impact the quoted premium. The dollar amounts paid on the past claims, while noteworthy, are not what carries the most weight.

Central New York house on fireA house fire is catastrophic and usually leads to hundreds of thousands of dollars paid in insurance claims. However, if that was the only claim in 5 years, a carrier will usually not decline the insurance application.

The belief is that the policyholder suffered an isolated and unordinary experience. While the payout was expensive, the likelihood of another soon after is slim.

On the other hand, a series of smaller dollar claims can send a red flag to the insurer that the risk is too high and that it's only a matter of time before the big claim comes along. That leads to the rejection of the insurance application.

The Consequences of Frequent Claims

Once insurers begin to decline an application, finding comparable coverage becomes challenging. That’s because the only carriers left can be ones that might be less desirable and offer fewer coverage options.

While that might not seem like a big deal, they'll often charge more than the leading companies who are now turning you down.

Managing Your Risk Profile

To maintain a favorable risk profile with insurance companies, consider these strategies, whether you own a business or have personal coverage:

  1. Implement robust safety protocols and training to minimize the occurrence of claims
  2. Set aside a budget to cover minor losses out-of-pocket, rather than filing a claim
  3. Work closely with your insurance agent to identify and address potential risk areas
  4. Regularly review and update your risk management plan to adapt to changing circumstances

By proactively managing risk and being strategic about when to file claims, policyholders can help keep premiums in check and maintain access to competitive coverage options.

We Can Help You Secure a Policy Tailored to Your Unique Circumstances

Navigating the world of insurance claims can feel overwhelming, but you don't have to face it alone.

At Horan, we strive to be your trusted advocate, providing the guidance and expertise you need to make informed decisions. Our experience working with multiple carriers gives us a unique perspective on how to manage your risk profile effectively.

By implementing the strategies we've covered—from robust safety protocols to strategic claims filing—you can maintain a favorable position with insurers and secure the competitive rates and exhaustive coverage that give you composure and security.

On the other hand, overlooking these principles can lead to

  1. higher premiums,
  2. limited coverage options, and
  3. unnecessary stress.

Let us help you take control of your insurance journey and protect what matters most.

Click the Get a Quote button below to start a conversation with our knowledgeable team and discover how we can tailor a policy to your unique circumstances.

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Daniel J. Middleton

Daniel is an accomplished content creator. He has been working in publishing for almost two decades. Horan Companies hired Daniel as its content manager in November 2022. The agency entrusted its messaging to him. Since then, Daniel has written insurance articles, service pages, PDF guides, and more. All in an effort to educate CNY readers. He's helping them understand the world of insurance so they can make informed decisions.