Chapter 5 Flashcards
What is the majority of policyholders surplus comprised of?
Past earnings
What affects capacity?
Growth
Investment results
Liquidity ratio formula
Cash + invested assets (FMV) / unearned premium + lae & loss reserve
What value of the liquidity ratio is desirable?
1.0
What result would aggressive valuation of reserves it reduction of FMV of investments have in the liquidity ratio?
Decrease
What does the premium-to-surplus ratio measure?
Relative exposure to underwriting risks
Capacity ratio formula
Net written premiums / surplus
What is a weakness of the capacity ratio?
Only considers one year if net written premiums
What does a high capacity ratio mean?
Company is aggressive in using surplus to leverage premium writing.
What is the value for capacity ratio recommended by the NAIC?
3:1
What does the reserves to surplus ratio measure?
Leverage
reserves to surplus ratio formula
Unearned premium reserve + loss&lae reserves / surplus
Combined ratio formula
Loss ratio + expense ratio
Ep formula?
Written premiums / expenses
Loss ratio formula?
Ep/claims
Operating ratio formula
Combined ratio - investment income ratio
Investment income ratio formula
Net investment income / ep
How does return on policyholder surplus assist in comparison of insurers?
Eliminates issues related to premium volume, underwriting results, and investment gains.
Summarizes overall operating success relative to resources.
This rating is an opinion of an insurer’s financial strength and ability to meet insurance obligations. It rates insurers with quantitative and qualitative measures.
Financial Strength Rating (FSR)
WHat does the FSC (Financial Size Category) indicate?
The size of the insurer based on ph surplus, adjusted for reserves and contingencies.
What are the categories of AM Best’s ratios?
Profitability
Liquidity
Capital and leverage
Loss Reserves
What do the FSR qualitative tests evaluat?
Capital structure
Reinsurance agreements
Loss Reserves
What are the FSR qualitative tests?
Investment diversity (liquidity and diversity) Management (integrity, capability, experience) Market position (ability to increase market share) Event risk (exposure to risk) Surplus adequacy
What are the secure FSR ratings?
A++ through B+
What are the vulnerable FSR ratings?
B-F
What does a “u” DSR rating modifier mean?
under review
What does a “g” DSR rating modifier mean?
group affiliation
What does a “p” DSR rating modifier mean?
pooling affiliation
What does a “r” DSR rating modifier mean?
reinsurance affiliation
What does the FSC measure?
Size and ability to handle insurance or investment risks.
What does a FSR rating of “s” mean?
Suspended
What does IRIS identify?
Insurers that may be impaired or need regulatory review.
What happens when an insurer falls outside the appropriate IRIS range?
No specific rules. State examiners would have to review.
What are the four overall IRIS tests?
1) gross premiums written to surplus (insurance exposure)
2) net premiums written to surplus (exposure after reinsurance)
3) change in net writings (% chg in year)
4) surplus aid to surplus
What does a large difference between gross premiums written to surplus and net premiums written to surplus mean?
Over-reliance on reinsurance
What is the acceptable percentage of change in net writings?
+- 33%
What could a large increase in net writings be a sign of?
Poor pricing
What could a large amount of surplus aid be a sign of?
Insufficient capitalization for direct insurance written
What are the four IRIS profitability tests?
- Two year overall operating (combined - investment)
- Investment yield
- Gross change in surplus
- Change in adjusted surplus
What is the formula for calculating investment yield?
Investment income / cash + invested assets
What could decreases in surplus be the result of?
Poor underwriting? Investment results, dividends, etc.
What are the two IRIS liquidity tests?
- Adjusted liabilities to liquid assets
10. Gross agents’ balances to surplus
What does adjusted liabilities to liquid assets measure?
Ability to meet obligations with liquid assets.
What does a rate over 100% on adjusted liabilities to liquid assets indicate?
Liquidity issues
What does gross agents’ balances to surplus indicate?
Dependence of surplus on assets of questionable liquidity.
What are the 3 IRIS reserve tests?
- One year reserve development to surplus
- Two year reserve development to surplus
- Estimated current reserve deficiency to surplus.
What does One year reserve development to surplus measure?
Change in surplus attributable to loss development of prior year reserves.
What does two year reserve development to surplus measure?
If reserves have been understated to inflate surplus.
Ratio widely used to determine insurance leverage?
Reserves to surplus ratio
List quantitative measures looked at by AM Best.
Profit margins, financial leverage, liquidity, and capital
Adjusted policyholders surplus changes to these are omitted under IRIS ratio 8; adjusted policyholders’ surplus profitability test.
Surplus notes
Capital changes
Surplus adjustments
A big difference in ratios 1 and 2 (gross and net premiums written to policholders surplus) indicates?
Heavy reliance on reinsurance
Which IRIS ratio measures liquidity?
- Gross agents balances to policyholders surplus.
If an insurer is too aggressive in valuing it’s reserves for losses and lae, the liquidity ratio me be overstated/understated?
Overstated
How is the FSR determined?
A proprietary model is used to calculate an insurer’s economic loss reserve, which is compared to reported reserves.
What is the purpose of BCAR?
Evaluate an insurer’s capital strength above minimum requirements.
Wharves the level given the highest priority for comprehensive review under IRIS?
A
An insurer looking into a reinsurer rejects the reinsurer after seeing that the reinsurer failed 7 of 14 financial ratio tests. The decision was made after looking at
IRIS
