Severity is the size of a loss when a claim occurs, usually the average or distribution of the amounts paid per claim. Together with frequency it determines expected losses.
Severity is skewed. Most claims are modest and a few are very large, so an average conceals the tail that drives reinsurance, reserves and capital needs. A distribution is the right object, with its upper percentiles reported.
Litigation increases severity uncertainty. Venue, jury behavior, damages caps and the presence of punitive exposure change the range of outcomes for the same underlying facts.
Severity is not the settlement value of a particular case. It is a population measure that describes the amounts claims have reached.
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