IRIS

Question 1

IRIS tests

Answer 1

are used by regulators to identify insurers that are in need of regulatory attention, ratio calc is compared to normal range

Question 2

IRIS1 IRIS2

Answer 2

• measures adequacy of surplus on direct and assumed basis excl effects of ceded prem
• measures adequacy of surplus on net basis

Question 3

Ratio3: Change in Net Writings

Answer 3

• 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
• difficult to expand without sacrificing pricing or UW stds -> should investigate source of expansions and whether maintained adequate pricing terms and conditions
• large decrease can be caused by sign of financial distress, pulling out of LOB, reducing writings due to large losses, loss of market share, or higher amnts of reins
• 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
• if unstable, look into whether assets are properly valued and liquid enough to meet cash demands and are reserves adequate
• if increasing cash flow to pay current claims, concern because very short term soln and increases risk of insolvency
• 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

Question 4

Ratio4:

Answer 4

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
• 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

Question 5

Ratio7: gross change in PHS & Ratio8: net change in adjusted PHS

Answer 5

• ultimate measure of change in financial condition
• too high ratios (>50%) may warrant investigation bc # of insolvent companies experience large increases in surplus prior to insolvency

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
• adjusted PHS in order to determine change in surplus from actual operations

Question 6

Ratio9: adjusted liabilities:liquid assets

Answer 6

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
• 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

Question 7

Ratio11&12

Answer 7

-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
• if R11 or R12 consistently showing adverse devel or R12 is consistently > R11, insurer may be intentionally understating

Question 8

Ratio13

Answer 8

-all #s are net

• measures adequacy of curr reserves, theory = insurers that have understated are more likely to have deficient reserves in future
• distortions 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

Question 9

Analyst Team System

Answer 9

• 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
• categorizes: A (immediate attention & financial analysis), B (does not require immed attention but may possibly have poor results), reviewed & no level
• reports only made available to insurance regulators
• no regulatory authority and limited resources