IRIS Ratios Flashcards
IRIS 3 (Overall Ratio)
Formula, range, indication
- Change (NWP) / prior year (NWP) | [-33%, 33%] | high or low –> potential lack of stability in operations, entry into new line, more lenient UW, increased used of reinsurance, discontinuing certain LOBs, loss of market share
IRIS 4 (Overall Ratio)
Formula, range, indication
- Surplus aid / surplus | < 15% | higher –> policyholder’s surplus may be inadequate, surplus aid improves results on other ratios enough to conceal important concerns
- Surplus aid = Sum (Ceded UEP non-affiliate) * (Reinsurance Ceded Commissions + Contingent Commissions) / (Reinsurance Ceded Premiums Affiliates + Non-Affiliates)
Must recalc IRIS 1, 2, 7, 10, 13 (excluding surplus aid) if IRIS 4 is unusual. These ratios have current year surplus in formula
IRIS 5 (Profitability Ratio)
Formula, range, indication
Measure of the profitability of an insurance company
2-yr overall operating ratio
- 2yr LR + 2yr ER - 2yr IIR | < 100% | lower –> better operating profit
- LR = (Incurred Loss + LAE + Dividends to policyholders) / EP
- ER = (Other UW Exp & Write-ins – Total Other Income) / NWP
- Investment Income Ratio (IIR) = NII / EP
IRIS 6 (Profitability Ratio)
Formula, range, indication
Investment Yield
- 2 * NII / denominator | (2%, 5.5%)
- [total cash and invested assets (curr + prior yr) + Investment income due & Accrd (curr + prior yr) – borrowed money (curr + pr yr) - NII]
- Low yield reasons:
- Speculative Investments
- Significant interest payments on borrowed money
- Really high investment expenses
- High yield reasons:
- Investments in high-risk instruments
- Really large dividend payments from subsidiaries to the parent
IRIS 7 (Profitability Ratio)
Measures of improvement or deterioration in the insurer’s financial condition during the year
- 7 = change (surplus) / prior yr surplus | (-10%, 50%)
Low –> deterioration in the insurer’s financial condition
- further analysis should be done at determining the reasons for the change (such as decrease in net income) and whether these factors will be repeated in future years
- concerning surplus decrease
High –> improvement in insurer’s financial condition
- insurers often have a drastic increase in surplus before insolvency
IRIS 8 (Profitability Ratio)
Formula, range, indication
Measures the improvement or deterioration in the insurer’s financial condition during
the year due to operational results
- 8 = Adjusted surplus / prior yr surplus | (-10%, 25%)
- Adjusted surplus = Surplus - Chg(surplus notes) - Capital/Surplus Paid-in or Transferred
Low –> deterioration in insurer’s financial condition based on operational results
- concerning surplus decrease
High –> improvement in financial conditions based on operational results
- insurers often have increase in surplus before insolvency
IRIS 9 (Liquidity Ratio)
Formula, range, indication
- Adjusted liabilities / liquid assets | < 100% | high –> trouble meeting short-term obligations
- Total liabilities – liabilities (deferred agents’ balance)
- Bonds + stocks + cash/cash equivalents/short term investments + securities receivable + investment income due & accrued + investments in parent, subsidiaries, affiliates
IRIS 10 (Liquidity Ratio)
Formula, range, indication
- Gross agents’ balances in collection / surplus | < 40% | high –> agents may be slow paying
What if IRIS 11 is Unusual?
Need to recalculate IRIS 5 after removing the prior year’s development (to obtain a more
accurate picture of the insurer’s current operating position)
IRIS 11-12 (Reserve Ratios)
Formula, range, indication
- 11 = 1-yr reserve dev / prior year surplus | < 20% | positive –> reserve deficiency
- 12 = 2-yr reserve dev / 2nd prior year surplus | < 20% | negative –> redundancy
IRIS 13 (Reserve Ratio)
- Estimated reserve difference / surplus | < 25% |provides an estimate on adequacy of current reserves
=NEPCY * avg(RTPCY-2, RTPCY-1) – ReservesCY
RTPt = (loss/LAE reserves + t-year reserve development) / EPt
How IRIS 13 can be Distorted?
- Significant increase/decrease in premium
- Reinsurance commutation (can cause a sudden increase in net reserves)
- Changes in product mix (between property and GL)
- Changes in reserving philosophy
Total Net Income
= UW Income + Net Investment Gain + Other Income – Dividend to Policyholders – Fed/Foreign taxes incurred
UW Income (IS) / Net Investment Gain
= EP – AY Loss – chg(prior AYs loss) – LAE – other UW expense
= EP – AY Loss & LAE – chg(prior AYs loss & LAE) – other UW expense
= NII + net realized capital gains – taxes
Net Investment Income / Net Investment Income Earned (NII)
- = Investment revenue – investment expense – non-federal TLF
Surplus
= Prior Surplus + net Income - stockholder dividends +∆:
- non-admitted assets (-)
- provision for reinsurance (-)
- net unrealized (FX) capital gains (+)
- net deferred income tax (+)
- surplus notes (+)
- change in gross paid-in & contributed surplus (+)
- cumulative effect of changes in accounting principles (+)
- Moving from gross of anticipated S&S to net of anticipated S&S
- Changes in tabular discounting rate
