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Exam 6 > IRIS > Flashcards

IRIS Flashcards

1
Q

How are IRIS tests used?

A
  • used by regulators to identify insurers that are in need of regulatory attention.
  • use tests to identify companies approaching financial difficulty
  • do not look a single ratio in isolation
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2
Q

Equation and normal range for Ratio 1:

A

Ratio 1: GWP:PHS (Unusual > 900%)

Ratio = GWP/ PHS

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3
Q

Factors to consider if Ratio 1 is unusual:

A
  • compare to Ratio 2
  • line of business
  • profitability
  • direct vs assumed business
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4
Q

Equation and normal range for Ratio 2:

A

Ratio 2: NWP:PHS (Unusual > 300%)

Ratio = NWP/ PHS

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5
Q

What does Ratio 1 measure?

A

Measures the adequacy of surplus on a direct &
assumed basis, excluding the effects of ceded
premium.

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6
Q

What does Ratio 2 measure?

A

This measures the adequacy of surplus on a net

basis.

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7
Q

Factors to consider if Ratio 2 is unusual:

A
  • if member of group of affiliates, what is the aggregate ratio?
  • profitability
  • line of business
  • adequacy of reinsurance protection
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8
Q

List each of the 13 IRIS ratios:

A

Ratio 1 = GWP to PHS
Ratio 2 = NWP to PHS
Ratio 3 = Change in NWP
Ratio 4 = Surplus Aid to PHS
Ratio 5 = 2yr Overall Operating Ratio
Ratio 6 = Investment Yield
Ratio 7 = Gross Change in PHS
Ratio 8 = Change in Adjusted PHS
Ratio 9 = Adjusted Liabilities to Liquid Assets
Ratio 10 = Gross Agents’ Balances to PHS
Ratio 11 = 1yr Reserve Development to PHS
Ratio 12 = 2yr Reserve Development to PHS
Ratio 13 = Estimated Current Reserve Deficiency: PHS

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9
Q

Equation and normal range for Ratio 3:

A

Ratio 3: Change in Net Writings
(Unusual > 33%; < -33%)

  • want to be within +/-33%

(Current NWP – Prior)/ Prior

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10
Q

Factors to look into if Change in NWP ratio (Ratio 3) is unstable:

A
  • are the assets properly valued & liquid enough to meet cash demands
  • are the reserves adequate?
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11
Q

Increased NWP does not necessarily mean there is a greater chance of insolvency, if it is accompanied by:

A
  • low NWP: PHS ratio (Ratio 2)
  • adequate reserving (Ratios 11, 12, 13)
  • profitable operations (Ratio 5)
  • stable product mix
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12
Q

Equation and normal range for Ratio 4:

A

Ratio 4: Surplus Aid: PHS (Unusual > 15%)

Equation = Surplus Aid / PHS

Surplus Aid = Ceding Commissions Ratio *
UEPR (Non Affiliates)

Commission Ratio = Commissions / Premiums
Ceded (affiliates & non affiliates)

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13
Q

Issues related to a high Surplus Aid ratio (Ratio 4):

A
  • it may indicate that management believes that surplus is inadequate
  • surplus aid may improve the results of the other ratios to such a degree that it conceals important areas of concern.
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14
Q

If Surplus Aid Ratio (Ratio 4) falls outside normal range, what other ratios need to be recalculated with the surplus aid removed?

A
  • Gross & Net WP: PHS (Ratios 1 & 2)
  • Gross change in PHS (Ratio 7)
  • Gross Agent’s Balances: PHS (Ratio 10)
  • Reserve Deficiency to PHS (Ratio 13)
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15
Q

Equation and normal range for Ratio 5:

A

Ratio 5: Two Year Overall Operating Ratio
(Unusual > 100%)

Equation: 2yr Loss Ratio + 2yr Expense Ratio – 2yr Investment Ratio

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16
Q

What does Ratio 5 measure?

A

This ratio measures the profitability of the
insurer. It also can help identify what is causing
the poor performance

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17
Q

Formula for 2 yr Loss Ratio:

A

(Net Loss, LAE & Policyholder Dividends over 2yrs) / (Net Premiums Earned in 2yrs)

18
Q

Formula for 2 yr Expense Ratio:

A

(2yr. Other underwriting exp. & write ins − 2yr. Other Income)/ (Net Premiums Written in 2yrs)

19
Q

Formula for 2 yr Investment Income Ratio

A

Net Investment income earned over 2yrs / Net Premiums Earned in 2yrs

20
Q

If losses are the cause of the poor performance for Ratio 5, what other ratios should be looked at?

A

Ratio 11 and Ratio 13

21
Q

When might ratio 5 need to be recalculated?

A

If the insurer is outside the normal range for Ratio 11, it needs to recalculate Ratio 5 after removing the prior year’s development.

22
Q

Equation and normal range for Ratio 6:

A

Ratio 6: Investment Yield (Unusual > 5.5%; <2%)

Investment Yield = 2*( Net Investment Income Earned / Cash & Invested Assets between current & prior yr)

Ratio indicates the general quality of the investment portfolio

23
Q

Formula for Cash & Invested Assets between current & prior yr

A

Current Yr Cash & Invested Assets
+ Prior Yr Cash & Invested Assets
+ Current Yr Investment Income Due & Accrued
+ Prior Yr Investment Income Due & Accrued
− Current Yr Borrowed Money
− Prior Yr Borrowed Money
− Net Investment Income Earned

Ratio is capped at minimum bound of 0

24
Q

Equation and normal range for Ratio 7:

A

Ratio 7: Gross Change in PHS
(Unusual > 50%)

Change in PHS / Prior PHS

25
Q

What is the ultimate measure of change in financial condition?

A

Ratio 7: Gross change in PHS

26
Q

Equation and normal range for Ratio 8:

A

Ratio 8: Net Change in Adjusted PHS

(Unusual > 25%;

27
Q

Formula for Change in Adjusted PHS:

A 
Change in Adjusted PHS = 
\+ Change in PHS 
–  Change in Surplus Notes 
–  Capital Paid In 
– Surplus Paid In
28
Q

What does Ratio 8 measure?

A

This ratio measures the change in financial condition, based on operational results.

29
Q

Equation and normal range for Ratio 9:

A

Ratio 9: Liabilities to Liquid Assets: (Unusual > 100%)

Liabilities to Liquid Assets = Adjusted Liabilities / Liquid Assets

  • Adjusted Liabilities = Liabilities – Liabilities equal to Deferred Agents Balances

** Liquid Assets = Liquid assets − Investments in parents, subsidiaries, affiliates

30
Q

What does Ratio 9 measure?

A

Measures insurers ability to meet financial demands

31
Q

Equation and normal range for Ratio 10:

A

Ratio 10: Gross Agents’ Balances to PHS
(Unusual > 40%)

=Gross AB in Course of Collection / PHS

Analyzed because can not be converted to cash in
the event of a liquidation.

32
Q

Equation and normal range for Ratio 11 and 12:

A

Ratio 11 & 12: One (& Two) Yr Reserve
Development to PHS (Unusual > 20%)

Ratio 11 = 1yr Development/ Prior PHS
Ratio 12 = 2yr Development / 2nd Prior PHS

33
Q

Equation and normal range for Ratio 13:

  • This is very highly tested!!
A

Ratio 13: Estimated Current Reserve Deficiency
to PHS
(Unusual > 25%)

=Estimated Deficiency / PHS

34
Q

Formula for estimated deficiency

A

Deficiency = Reserves required – Current Reserves

35
Q

Formula for reserves required

A

EP * Ratio of Reserves:Premium

36
Q

Formula for Ratio of Reserves: Premium

A

Average(Reserves:Prem from prior yr, Reserves:Prem from 2nd prior yr)

37
Q

Formula for Reserves: Premium from prior yr

A

(Reserves from prior yr + 1yr loss development) / Premiums Earned in prior yr

38
Q

Formula for Reserves: Premium from 2nd Prior yr

A

(Reserves from 2nd prior yr + 2yr loss development) / Premiums Earned in 2nd prior yr

39
Q

What does Ratio 13 measure?

A

This ratio measures the adequacy of current

reserves.

40
Q

List 2 distortions to Ratio 13 that may arise when there are changes in the exposure

A

-Significant changes in premium volume: An
increase in premium overstate deficiency

-Shift in product mix: eg a shift from property
to liability lines will understate the deficiency.

Exam 6 (32 decks)

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