The excess severity formula with retention and limit is:
Expected loss = (Losses above retention) * (Probability of losses above retention)
What is Excess Severity Formula?
The Excess Severity Formula is useful for calculating the potential debt of an XOL reinsurer. It can also be used to price XOL reinsurance contracts. The excess asperity formula with memory and limit is used to calculate the maximum asperity of a loss that is below an excess of misfortune (XOL) reinsurance treaty.
So, one can say that in security, particularly in the context of waste of loss reinsurance, the "waste severity" refers to the amount by which a loss exceeds a particular retention amount and until a limit.
Hence, The formula helps calculate the amount that the insurer retains before the reinsurance coverage comes into play.