Analysis of Loss Ratios Using a Mixed Linear Model

Abstract

Loss ratios have been employed by a broad range of users for diverse purposes. Insurance companies, regulators, investors, rating agencies, investment analysts, lenders and others have used the loss ratio for their particular purposes. These include the evaluation of an organization’s performance by management and investors, providing service providers with information on relative quality of competing companies, projecting future earnings growth and testing products against minimum loss ratio standards. In risk theory, loss ratios have been widely used in credibility analysis to predict future losses, which is pertinent to rate making. They have also been used to compute solvency margins. Loss ratios have been proposed as a method to compare and evaluate insurers in a variety of ways. Proposed users include insurance illustration requirements, accounting standards and solvency regulations. It is therefore important to understand the nature of the loss ratio and some of the issues that impact on its use.