Which statement about the relationship between frequency, severity, and loss prevention is correct?

Which statement about the relationship between frequency, severity, and loss prevention is correct?

• A. Avoidance
• B. Loss Prevention
• C. Moral hazard
• D. High Frequency, Low Severity results in Loss Prevention

Answer: (D)

Loss prevention aims to reduce the probability of a loss happening. When losses occur frequently but are small in impact, implementing preventive measures cuts the number of incidents and lowers the expected total losses. So, for a scenario with high frequency and low severity, focusing on loss prevention makes the most sense because preventing many small losses adds up to a big reduction in overall risk. Loss reduction would target how bad a loss is if it occurs, which isn’t the main issue here; risk transfer (like insurance) is typically used for handling large, rare losses, and moral hazard relates to behavior changes after being insured rather than this frequency-severity relationship.

Loss prevention aims to reduce the probability of a loss happening. When losses occur frequently but are small in impact, implementing preventive measures cuts the number of incidents and lowers the expected total losses. So, for a scenario with high frequency and low severity, focusing on loss prevention makes the most sense because preventing many small losses adds up to a big reduction in overall risk. Loss reduction would target how bad a loss is if it occurs, which isn’t the main issue here; risk transfer (like insurance) is typically used for handling large, rare losses, and moral hazard relates to behavior changes after being insured rather than this frequency-severity relationship.