Average Claim Amount

Concept

The average claim amount is the ratio of the sum of all claims payments to the number of underlying claims within a given period or sub-portfolio, and is one of the most fundamental actuarial metrics for describing the loss characteristics of a line of business.

Decomposition into Claim Frequency and Claim Severity

The expected total claims cost of a line of business can be analytically decomposed into the product of claim frequency (number of claims per unit of exposure) and average claim amount (mean claim severity per claim); this decomposition allows changes in claims cost to be analyzed in more detail and their causes — such as a change in claim frequency or a change in claim severity — to be identified more precisely.

Relevance for Pricing and Reserving

The average claim amount is a core building block of pricing, since together with expected claim frequency it determines the net risk premium of a line of business; in reserving, the average claim amount is also used to sanity-check reserve estimates and identify trends in claims development, with extreme individual losses (large losses) often considered separately to avoid distorting the average.