Severity modelling practice notes

Paper - January 2015

The modelling of severity is generally considered the most challenging and important part of the Loss Distribution Approach (LDA).

There are three key areas of focus when estimating severity models:

• Establishing a portfolio of potential models
• Fitting the models to the predefined loss data
• Selecting the most appropriate model(s)

These practice notes represent a summary of the industry thinking around model development in 2015 and are intended as a guide for practitioners and to allow expertise to be shared among the membership. Though the AMA guidance to which these notes refer is now out of date, much of the statistical methodology is still relevant today. ORX members can log in to read the findings.