KPI of the Day – Accounting Performance: $ Claims severity
Definition
Measures the total cost of claims incurred over the period.
Purpose
To get a reliable estimate of liability insurance parameters.
Recommendations
By gaining more control over liability claims, organizations can substantially improve their risk management strategies. Two of the major trends in claims processing, concern the issues of “severity” and “frequency”. Severity and frequency are two of the primary focus areas for judging estimated loss and determining loss reserves. Severity is perhaps the most unknown variable in determining losses incurred, since severity is known only for claims reported and paid as of the valuation date.
High severity claims account for the greater part of total claims costs, whereas high frequency claims cover moderate fraud and have become increasingly manageable in terms of costs.
Successful practices in effectively managing high severity claims include:
- Outsourcing expertise to effectively manage claims cost and outcome;
- Enhance subject matter expertise through appropriate training of personnel;
- Specific know-how for every industry and liability issue;
- Legal costs management to drive down general liability costs;
- Use of available resources to control total costs.
When measuring this KPI, keep in mind that targets may vary considerably according to the type of claims. Also, economic, demographic and legal factors can place influence on this KPI, such as changes in the price index. In addition to this, data collection requires a well-documented record that captures the currency amount of claims.
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