IRIS Flashcards
How are IRIS tests used?
- 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
Equation and normal range for Ratio 1:
Ratio 1: GWP:PHS (Unusual > 900%)
Ratio = GWP/ PHS
Factors to consider if Ratio 1 is unusual:
- compare to Ratio 2
- line of business
- profitability
- direct vs assumed business
Equation and normal range for Ratio 2:
Ratio 2: NWP:PHS (Unusual > 300%)
Ratio = NWP/ PHS
What does Ratio 1 measure?
Measures the adequacy of surplus on a direct &
assumed basis, excluding the effects of ceded
premium.
What does Ratio 2 measure?
This measures the adequacy of surplus on a net
basis.
Factors to consider if Ratio 2 is unusual:
- if member of group of affiliates, what is the aggregate ratio?
- profitability
- line of business
- adequacy of reinsurance protection
List each of the 13 IRIS ratios:
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
Equation and normal range for Ratio 3:
Ratio 3: Change in Net Writings
(Unusual > 33%; < -33%)
- want to be within +/-33%
(Current NWP – Prior)/ Prior
Factors to look into if Change in NWP ratio (Ratio 3) is unstable:
- are the assets properly valued & liquid enough to meet cash demands
- are the reserves adequate?
Increased NWP does not necessarily mean there is a greater chance of insolvency, if it is accompanied by:
- low NWP: PHS ratio (Ratio 2)
- adequate reserving (Ratios 11, 12, 13)
- profitable operations (Ratio 5)
- stable product mix
Equation and normal range for Ratio 4:
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)
Issues related to a high Surplus Aid ratio (Ratio 4):
- 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.
If Surplus Aid Ratio (Ratio 4) falls outside normal range, what other ratios need to be recalculated with the surplus aid removed?
- 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)
Equation and normal range for Ratio 5:
Ratio 5: Two Year Overall Operating Ratio
(Unusual > 100%)
Equation: 2yr Loss Ratio + 2yr Expense Ratio – 2yr Investment Ratio
What does Ratio 5 measure?
This ratio measures the profitability of the
insurer. It also can help identify what is causing
the poor performance
Formula for 2 yr Loss Ratio:
(Net Loss, LAE & Policyholder Dividends over 2yrs) / (Net Premiums Earned in 2yrs)
Formula for 2 yr Expense Ratio:
(2yr. Other underwriting exp. & write ins − 2yr. Other Income)/ (Net Premiums Written in 2yrs)
Formula for 2 yr Investment Income Ratio
Net Investment income earned over 2yrs / Net Premiums Earned in 2yrs
If losses are the cause of the poor performance for Ratio 5, what other ratios should be looked at?
Ratio 11 and Ratio 13
When might ratio 5 need to be recalculated?
If the insurer is outside the normal range for Ratio 11, it needs to recalculate Ratio 5 after removing the prior year’s development.
Equation and normal range for Ratio 6:
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
Formula for Cash & Invested Assets between current & prior yr
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
Equation and normal range for Ratio 7:
Ratio 7: Gross Change in PHS
(Unusual > 50%)
Change in PHS / Prior PHS
What is the ultimate measure of change in financial condition?
Ratio 7: Gross change in PHS
Equation and normal range for Ratio 8:
Ratio 8: Net Change in Adjusted PHS
(Unusual > 25%;
Formula for Change in Adjusted PHS:
Change in Adjusted PHS = \+ Change in PHS – Change in Surplus Notes – Capital Paid In – Surplus Paid In
What does Ratio 8 measure?
This ratio measures the change in financial condition, based on operational results.
Equation and normal range for Ratio 9:
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
What does Ratio 9 measure?
Measures insurers ability to meet financial demands
Equation and normal range for Ratio 10:
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.
Equation and normal range for Ratio 11 and 12:
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
Equation and normal range for Ratio 13:
- This is very highly tested!!
Ratio 13: Estimated Current Reserve Deficiency
to PHS
(Unusual > 25%)
=Estimated Deficiency / PHS
Formula for estimated deficiency
Deficiency = Reserves required – Current Reserves
Formula for reserves required
EP * Ratio of Reserves:Premium
Formula for Ratio of Reserves: Premium
Average(Reserves:Prem from prior yr, Reserves:Prem from 2nd prior yr)
Formula for Reserves: Premium from prior yr
(Reserves from prior yr + 1yr loss development) / Premiums Earned in prior yr
Formula for Reserves: Premium from 2nd Prior yr
(Reserves from 2nd prior yr + 2yr loss development) / Premiums Earned in 2nd prior yr
What does Ratio 13 measure?
This ratio measures the adequacy of current
reserves.
List 2 distortions to Ratio 13 that may arise when there are changes in the exposure
-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.
