Fixed versus Random Effects in Poisson Regression Models for Claim Counts: A Case Study with Motor Insurance

This paper examines the validity of some stylized statements that can be found in the actuarial literature about random effects models. Specifically, the actual meaning of the estimated parameters and the nature of the residual heterogeneity are discussed. A numerical illustration performed on a Belgian motor third party liability portfolio supports this discussion.

KEYWORDS: Poisson mixture, risk classification, claim frequencies, random effects, fixed effects.