IRIS Flashcards
IRIS tests are used
by regulators to identify insurers that are in need of regulatory attention, ratio calc is compared to normal range
individual ratio should not be reviewed in isolation
result of other ratios in addition to other pertinent info should be considered
Ratio1: GWP:PHS
GWP = direct WP+reins assumed
PHS = ending surplus
-measures adequacy of surplus on direct and assumed basis excl effects of ceded prem
>9 is unusual
if high, compare to ratio2 (if large variance, may be relying too heavily on reins or involved in fronting agreement or small diff then sign that reins protection is insuff), consider LOB (if long tailed, should maintain lower ratios bc harder to estimate losses), consider profitability (insurers that are profitable and have adequate reins coverage can sustain higher ratios), % of assumed business (insurer has less control over business it assumes so if large portion should review and understand)
Ratio2: NWP:PHS
- measures adequacy of surplus on net basis
- measures adequacy of surplus on net basis
- >3 is unusual
- if high, consider LOB (if long tailed, should maintain lower ratios bc harder to estimate losses), consider profitability (insurers that are profitable can sustain higher ratios), quality of reinsurers, adequacy of reinsurance protection against large losses, whether a member of group of affiliated companies (high ratio for insurer
Ratio3: Change in Net Writings
R3=(Curr NWP-Prior NWP)/Prior NWP
- >0.33 or <-0.33 is unusual
- large change may indicate lack of stability in operations
- large increase in prem can be caused by abrupt entry into new lines or territories or insurer attempting to increase cash flow to meet loss payments
- unstable results yr to yr indicates that insurer may not have good controls on its UW or solid business plan, if so good chance insurer is going to run into trouble in future
not greater chance of insolvency if increase in NWP is accompanied by
low ratio2, adequate reserving, profitable operations, and stable product mix
reduction in NWP accompanied by relatively stable GWP may indicate
that insurer is trying to increase cash flow from ceding commissions -> look at surplus aid to determine
Ratio4: Surplus Aid:PHS
Surplus Aid=ceding comm ratio*ceded UEP (xAffiliates)
Ceding comm ratio=reins ceded comm/reins prem ceded
- intended to identify companies that rely heavily on reinsurance as means to enhance surplus
- >0.15 is unusual
- if high ratio, may indicate management believes surplus is inadequate or surplus aid may improve results of other ratios to such degree that it conceals important areas of concern
- if outside normal range, important to use careful scrutiny even if well in other ratios and ratios should be recalc with surplus adjusted to completely remove surplus aid
Ratios 1&2, gross change in PHS (7), gross agents balance:PHS (10), estimated curr reserve deficiency to PHS (13)
Ratio5: 2 yr overall operating ratio
R5=LR+Expense ratio-Investment income ratio
LR=Loss, LAE, PH dividends/EP
ExpR=other UW exp & write ins-other income/NWP
IIR=net investment income earned/EP
- measures profitability of insurer, can help identify what is causing poor performance, 2yrs used to smooth unusual fluctuations
- >1 is unusual
- if losses are cause of poor performance, should look at 1yr reserve development to PHS (11) and estimated curr reserve deficiency to PHS (13) because reserve development or deficiency can distort ratio
- if outside range for ratio11, recalc ratio5 removing prior yr development
Ratio6: investment yield
R6=2*(net investment income earned/cash&invested assets btw curr and prior yr)
Denom=cash&invested assets (prior&curr) + investment income due&accrued (prior&curr) –borrowed money (prior&curr) – net investment income earned
usual range >0.03 & <0.065
- indicates general quality of investment portfolio and can possibly identify risky, inefficient or expensive investment strategy
- if high or low yield, should look at types of investments in AS and exhibit of net investment income
Ratio7: gross change in PHS
R7=change in PHS/prior PHS
- ultimate measure of change in financial condition
- unusual range: >50% & <-10%
- too high ratios (>50%) may warrant investigation bc # of insolvent companies experience large increases in surplus prior to insolvency
factors affecting changes in surplus
=net gain/loss, unrealized capital gains/losses, change in surplus notes, capital paid in, & surplus paid in, stockholder dividends, changes in nonadmitted assets, changes in surplus aid from reins, accounting changes and corrections of errors, change in DTA, change in ownership
Ratio8: net change in adjusted PHS
R8=change in adjusted PHS/prior PHS
change in adjusted PHS=Curr yr PHS-changes in surplus notes-capital paid in/transferred-surplus paid in/transferred – PHS prior yr
- ratio measures change in financial condition based on operational results
- unusual range: >25% & <-10%
- adjusted PHS in order to determine change in surplus from actual operations
Ratio9: adjusted liabilities:liquid assets
Adj liabilities=liab-liab equal to deferred agents’ balances
Liquid assets=liquid assets-investments in parents, sub, affiliates
Incl bonds, stocks, cash-equiv, short term investments, receivables for securities and investment income due and accrued
- measures ability to meet financial demands and provides rough indication of possible implications for PHs if liquidation is necessary
- unusual range: >100%
- many insolvents had high ratios prior to insolvency
- if high, focus on reserve adequacy and whether insurer has right valuation, mix&liquidity of assets in order if they can meet obligations
Ratio10: gross agents’ balances in course of collection:PHS
- gross AB can not be converted to cash in event of liquidation
- unusual range: >40%
Ratio11&12: 1&2 yr reserve development:PHS
R11=1yr development/prior PHS
R12=2yr development/second prior PHS
- reserves are net of S&S and gross of discounts
- ratios are same as development tests from 5-yr hist data exhibit
- if sign adverse devel, focus on which lines and AY caused it
- unusual range: >20%
if R11 or R12 consistently showing adverse devel or R12 is consistently > R11
insurer may be intentionally understating
Ratio13: estimated curr yr deficiency:PHS
Estimated deficiency=reserves required-curr reserves
Reserves required=EP*ratio of reserves: prem
reserves: prem=avg[(reserves from prior yr+1yr loss devel)/EP in prior yr,(reserves from 2nd prior+2yr loss devel)/EP in 2nd prior]
- all #s are net
- measures adequacy of curr reserves, theory = insurers that have understated are more likely to have deficient reserves in future
- unusual range: >25%
distortions to R13 may arise when
there are changes in exposure due to mismatch in reserves:prem ratio
sign changes in prem vol will show deficiency greater and shift in product mix will understand if shift from prop to liab lines so good idea to calc ratio separately by LOB
-can be distorted to surplus aid from reins, reserve strengthening, changes in reserve philosophy, and commutation too
Analyst Team System
- consists of financial examiners and analysts from 4 geo zones of NAIC
- objective=to identify companies requiring immediate attention so analyze IRIS, RBC and other monitoring tools
- reports only made available to insurance regulators
- no regulatory authority and limited resources
Analyst Team System categorizes
A (immediate attention & financial analysis), B (does not require immed attention but may possibly have poor results), reviewed & no level
if have > 4 unusual IRIS ratios
requiring a higher priority
level by NAIC analyst team in prioritization. State regulators might need to conduct
an onsite financial exam since the off-site financial monitoring is showing potential
concern
reasons for unusual value of IRIS ratio 4
-Increase to Surplus Aid through a greater use of reinsurance as part of company
strategy for growth or mix of business related to exposure or geography
-Increase to Surplus Aid caused by increase in reinsurance commission rates
-A relatively new company may be increasing their writing potential by
utilizing larger amounts of reinsurance as a means of risk transfer
-Property insurers utilize reinsurance when business is in more catastrophe prone
areas
to adjust ratios for surplus aid
can divide by (1-IRIS4)
For IRIS 1, 2, 10, 13
IRIS 7 takes more effort since 2 different surplus aids
A high value for this IRIS2 might be interpreted less severely
in the presence of several mitigating factors
- Steadily increasing profits
- Adequate reinsurance
- Affiliated companies in group have lower ratios
response taken by the regulator in response to the IRIS tests
Failing ratios on the IRIS tests provides regulators an early warning of potential
financial problems of an insurer. The regulators prioritize resources on companies
with more failing tests. The tests indicate in which areas to further investigate.
