Comparing Severity with Frequency The severity of claims as an indication of the economic risk of providing services should be recognized as a long-term rather than instant measurement of loss. Usually, claims are not resolved until long after services are provided. Paid claims are a “lagging indicator” of risk and, therefore, have little predictive value for firms entering into emerging professional service sectors. Statistics on the cost of paid claims, however, are extremely valuable for those firms providing services in a mature market segment. The following graphs show five industry sectors and compare frequency and severity. To aid understanding, the frequency of claims is indicated as a percentage of all claims in that year for the five-year period. There is no
comparison between the amount of reported fees for the type of project or the number of projects in that category and the frequency of claims. The comparison of the percentage of severity—the percent of all the defense and indemnity costs paid when an indemnity payment was made on behalf of a policyholder— to the indicated percentage of frequency can be helpful. The severity percentages shown for a specific year indicate the percentage of the five-year total of all costs for claims closed in that year. Therefore, they may actually relate to claims from an earlier year. Still, the comparison between the percentages of frequency and severity can indicate that claims cost more on some projects.
Residential Project Claims
Residential projects, including condos, apartments, and single-
family and townhouse structures, not only represented a high severity to frequency ratio, but when compared to reported billings for professional services, these projects were at the top of the risk-to-reward ratio. Although most claims for this project type were brought against architects as the prime design professionals, direct and interprofessional claims against mechanical and structural engineers accounted for a high level of paid losses. Unlike most other project types, highway-related claims of negligence included a significant proportion of user injury claims. Often, peaks in severity, such as in 2018 and 2019, were the result of significant bodily injury claims. The frequency often lags a few years behind funding, and for non-bodily injury claims, seems to be highly dependent on client procedures and the pressure of the political system for cost recovery as a problem develops.
Frequency = reported claims Severity = CNA dollars spent
25%
20%
15%
10%
5%
0%
2015
2016
2017
2018
2019
Highway Project Claims
Frequency = reported claims Severity = CNA dollars spent
60%
50%
40%
30%
20%
10%
0%
2015
2016
2017
2018
2019
10 • From Risk to Profit - Benchmarking and Claims Studies
Victor
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