payment for personal injury to one claimant to $10,000, then there will be no payments for losses to one claimant in excess of $10,000. Hence the total payments for these losses could be reduced with a consequent effect on the average payment (severity). Alternatively, if the face amount of a Life Insurance policy is $50,000, then the amount paid upon the death of the insured is $50,000-no more, no less.
The pure premium is the average amount of loss per exposure to risk.
Thus pure premium is the ratiofrequency, is an extremely important measure in placing a value on an insurance contract. Almost without exception the terms of the insurance contract have a determining effect on severity. For example, if Automobile Liability Insurance limits