The Incidence Rate refers to the number of times that a specific loss occurs.  Car Insurance Companies keep statistics of all claims received and paid in the different categories for example theft, carjacking, accident, fire and total write-off.

The Loss Severity will measure the amounts that were paid out on claims, again recorded under the various categories. As an example an Insurance Company will report in their annual returns that the incidence rate for theft was 5 432 (the total number of car stolen) and the loss severity was R5 764 000 (the total amount of claims paid out.)

These calculations are done for all types of risks handled by the insurance company. It stands to reason that the more claims the insurance company must pay, the less their profits will be. The incidence rate and the loss severity are used to calculate car insurance premiums. Other factors also play a role in the individual’s premium calculation, such as age, gender, previous claims record and security measures implemented. But we all pay for the losses at the end of the day as insurance companies will increase their overall premiums after a particularly bad year of losses.