Which two variables are losses in insurance dependent on?

The correct answer identifies two critical aspects of insurance losses: the frequency of losses and the severity of losses.

Frequency refers to how often losses occur within a specific timeframe. For example, if an insured entity experiences multiple claims within a given period, it indicates a higher frequency of losses. This variable is important for insurers because it helps them estimate the likelihood of future claims, which subsequently impacts the pricing of premiums and reserves necessary to cover potential payouts.

Severity, on the other hand, relates to the financial impact of each individual loss. This involves assessing how much the insurer must pay out when a claim is made. High severity losses can significantly affect an insurer's profit margins and financial stability, especially if they occur frequently.

By analyzing both the frequency and severity of losses, insurers can better understand potential risks, set appropriate premiums, and manage their overall exposure to loss, which is fundamental to the functioning of insurance as a risk management tool. This dual approach provides a comprehensive view of the risk landscape, allowing insurers to operate more effectively.