An Analysis of Variations in Leverage Ratios Among Insurers

Insurers accept and manage risk. The insurance market has long sought to measure the operating leverage and risk of various insurers. The premium to surplus ratio and the reserve to surplus rat o are traditional measures of this leverage and risk. This paper examines both the sources of risk to an insurer and how the insurer can reduce that risk. It also examines the effectiveness of various leverage indices. Finally, it proposes an alternative model of aggregate leverage. The parameters of this model are estimated by fitting an econometric model to data representing 115 insurers. This alternative model suggests that conventional indices of leverage fail to identify those insurers whose surplus is highly leveraged by risk.