IRIS Ratios

Question 1

What is IRIS?

Answer 1

A collection of analytical solvency tools and databases to provide state insurance departments with an integrated approach to screening and analyzing the the financial condition of insurers operating within their respective states

Question 2

What is IRIS Ratio 1 and it’s normal range?

Answer 2

IRIS Ratio 1 = Gross Written Premium / Policy Holder Surplus

Normal Range is less than 900%

Question 3

Considerations if IRIS Ratio 1 is outside of the normal range

Answer 3

1. Does the insurer have adequate reinsurance protection with financially strong reinsurer (indicated by IRIS Ratio 2, NWP to PHS)?
2. Is the insurer’s business consolidated on less risky short-tailed lines or riskier long-tailed lines which tend to have lower GWP to PHS ratios?
3. Is the insurer profitable (indicated by IRIS Ratio. 5, 2-Year Overall Operating Ratio)? Insurers who are consistently profitable and have adequate reinsurance protection are better able to sustain high GWP to PHS ratios than unprofitable insurers.

Question 4

What is IRIS Ratio 2 and it’s normal range?

Answer 4

IRIS Ratio 2 = Net Written Premium / Policyholder Surplus

Normal Range is less than 300%

Question 5

Considerations if IRIS Ratio 2 is outside of the normal range

Answer 5

1. Is the insurer’s business consolidated on less risky short-tailed lines or riskier long-tailed lines which tend to have lower NWP to PHS ratios?
2. Is the insurer profitable (indicated by IRIS Ratio. 5, 2-Year Overall Operating Ratio)? Insurers who are consistently profitable and have adequate reinsurance protection are better able to sustain high NWP to PHS ratios than unprofitable insurers.
3. Are the insurer’s reinsurance contracts with financially strong reinsurers?
4. Are there any gaps in the reinsurance tower which may leave the insurer vulnerable if a catastrophic loss were to be experienced?

Question 6

What is IRIS Ratio 3 and it’s normal range?

Answer 6

IRIS Ratio 3 = (Current Year Net Written Premium - Prior Year Net Written Premium) / Prior Year Net Written Premium

Normal range is between -33% and +33%

Question 7

Consideration if IRIS Ratio 3 is outside of the normal range

Answer 7

If an insurer’s NWP undergoes significant growth, it may be a sign the insurer is having cashflow problems so it’s increasing premium volume to offset the issue.

1. Are the assets properly valued and sufficiently liquid to meet cashflow demands (indicated by IRIS Ratio 9, Adjusted Liability to Liquid Assets)?
2. Are the reserves adequate to cover future loss payments (indicated by IRIS Ratio 11, 1-Year Development to PHS; IRIS Ratio 12, 2-Year Development to PHS; and IRIS Ratio 13, Estimated Current Reserve Deficiency to PHS)?

Question 8

What is IRIS Ratio 4 and it’s normal range?

Answer 8

IRIS Ratio 4 = [(Reinsurance Ceded Commissions / Reinsurance Premium Ceded) * Unearned Premium Reserve] / Policyholder Surplus

Normal range is less than 15%

Question 9

Considerations if IRIS Ratio 4 is outside the normal range

Answer 9

If IRIS Ratio 4 is outside of the normal range, this is an indicator that management may believe that PHS is inadequate and is attempting to use reinsurance to obtain surplus relief.

When IRIS Ratio 4 is greater than 15%, the following ratios must be adjusted to remove surplus aid:
- IRIS Ratio 1, GWP to PHS
- IRIS Ratio 2, NWP to PHS
- IRIS Ratio 7, Change in PHS
- IRIS Ratio 10, Gross Agents’ Balances to PHS
- IRIS Ratio 13, Estimated Current Reserve Deficiency to PHS

Question 10

What is IRIS Ratio 5 and it’s normal range?

Answer 10

IRIS Ratio 5 = [(Net Loss + LAE + Dividends)] / Earned Premium + [(Other Underwriting Expense - Other Income)] / Written Premium - (Investment Income Earned / Earned Premium)

Normal range is less than 100%

Question 11

Considerations if IRIS Ratio 5 is outside the normal range

Answer 11

1. Is IRIS Ratio 11, 1-Year Development to PHS or IRIS Ratio 13, Estimated Current Reserve Deficiency to PHS, outside of the normal ranges? If so, Loss & LAE Ratio should be adjusted for 1-year development to reflect the current state of the insurer.

Question 12

What is IRIS Ratio 6 and it’s normal range?

Answer 12

IRIS Ratio 6 = Net Investment Income Earned / Current and Prior Year Average Cash and Invested Assets

Normal range is between +2.0% and +5.5%

Question 13

Considerations if IRIS Ratio 6 is outside the normal range?

Answer 13

1. If IRIS Ratio 6, Net Investment Income Earned / Current and Prior Year Average Cash and Invested Assets, is below 2.0%, it may be an indicator that the insurer has significant investments in affiliated insurers or real estate which may not be liquid enough to meet cashflow demands.
2. If IRIS Ratio 6 is above 5.5%, it may be an indicator that insurers could be investing in risky investments which may excessively leverage surplus.

Question 14

What is IRIS Ratio 7 and it’s normal range?

Answer 14

IRIS Ratio 7 = (Current Policyholder Surplus - Prior Policyholder Surplus) / Prior Policyholder Surplus

Normal range is between -10% and +50%

Question 15

Considerations if IRIS Ratio 7 is outside the normal range?

Answer 15

1. Is the insurer profitable (indicated by IRIS Ratio 5, 2-Year Operating Ratio)?
2. Has the insurer had an increase in unrecognized capital losses?
3. Has the insurer had significant changes in surplus notes, capital paid-in or transferred, or surplus paid-in or transferred (indicated by IRIS Ratio 8, Change in Adjusted PHS)?
4. Has the insurer paid and stockholder dividends?
5. Has the insurer had a change in surplus aid from reinsurance (indicated by IRIS Ratio 4, Surplus Aid to PHS)?

Question 16

What is IRIS Ratio 8 and it’s normal range?

Answer 16

IRIS Ratio 8 = (Current Policyholder Surplus - Change in Surplus Notes - Capital Paid-in or Transferred - Surplus Paid-in or Transferred - Prior Policyholder Surplus) / Prior Policyholder Surplus

Normal range is between -10% and 25%

Question 17

Considerations if IRIS Ratio 8 is outside the normal range

Answer 17

1. What is driving the change in surplus (e.g. U/W losses, expense, change in nonadmitted assets, change in reinsurance provision)?

Question 18

What is IRIS Ratio 9 and it’s normal range?

Answer 18

IRIS Ratio 9 = (Total Liabilities - Deferred Agents’ Balances) / (Bonds + Stocks + Cash & Cash Equivalents + Short-Term Investments + Receivables for Securities + Investment Income Due & Accrued - Investments in Parents & Affiliates)

Normal range is less than 100%

Question 19

Considerations if IRIS Ratio 9 is outside the normal range?

Answer 19

1. If IRIS Ratio 9, Adjusted Liabilities to Liquid Assets, is outside the normal range, then the reserves should be reviewed for adequacy and the profitability and cashflows to determine whether or not they are appropriate.

Question 20

What is IRIS Ratio 10 and it’s normal range?

Answer 20

IRIS Ratio 10 = Gross Agents’ Balances / Policyholder Surplus

Normal range is less than 40%

Question 21

Considerations if IRIS Ratio 10 is outside the normal range

Answer 21

1. Have agents’ balances over 90 days been booked as admitted assets?

Question 22

What is IRIS Ratio 11 and it’s normal range?

Answer 22

IRIS Ratio 11 = 1-Year Reserve Development / Prior Policyholder Surplus

Normal range is less than 20%

Question 23

Considerations if IRIS Ratio 11 is outside the normal range

Answer 23

1. Is IRIS Ratio 12, 2-Year Reserve Development to PHS, also atypical?
2. Does an analysis of Schedule P reveal any potential reserving issues?

Question 24

What is IRIS Ratio 12 and it’s normal range?

Answer 24

IRIS Ratio 2 = 2-Year Reserve Development / Second Prior Policyholder Surplus

Normal range is less than 20%

Question 25

Considerations if IRIS Ratio 12 is outside the normal range

Answer 25

1. Have there been any reinsurance write-offs or commutations?
2. Does an analysis of Schedule P reveal any potential reserving issues?

Question 26

What is IRIS Ratio 13 and it’s normal range?

Answer 26

IRIS Ratio 13 = [AVERAGE{(Prior Loss Reserve + 1-Year Reserve Development) / Prior Earned Premium), (Second Prior Loss Reserve + 2-Year Reserve Development) / Second Prior Earned Premium} * Current Earned Premium - Current Loss Reserve] / Current Policyholder Surplus

Normal range is less than 25%

Question 27

Considerations if IRIS Ratio 13 is outside the normal range

Answer 27

1. Has there been significant premium growth (indicated by IRIS Ratio 3, NWP Growth)?
2. Has there been any significant shifts in exposures written (e.g. from long-tailed to short-tailed)? If this is the case, the estimated reserve deficiency should be calculated by line of business.