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Exam 6 > Part 14 (NAIC IRIS and Odomirok 20) (****) > Flashcards

Part 14 (NAIC IRIS and Odomirok 20) (****) Flashcards

1
Q

What are IRIS tests used for

A

Used by regulators to identify insurers that are in need of regulatory attention

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2
Q

Ratio 1

Name, Ratio, Unusual Range

A

Name: GWP to PHS

Ratio = GWP / PHS

Unusual Range: Over 900

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3
Q

Ratio 2

Name, Ratio, Unusual Range

A

Name: NWP to PHS

Ratio: NWP / PHS

Unusual Range: Over 300

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4
Q

Ratio 3

Name, Ratio, Unusual Range

A

Name: Change in NWP

Ratio = (Current NWP - Prior NWP) / Prior NWP

Unusual Range: Over 33, Under -33

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5
Q

Ratio 4

Name, Ratio, Unusual Range

A

Name: Surplus Aid to PHS

Ratio = Surplus Aid / PHS
where surplus aid = Ceding commissions % * UEPR

Unusual Range: Over 15

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6
Q

What are the Overall Ratios

A

1, 2, 3, and 4

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7
Q

What are the Profitability Ratios

A

5, 6, 7, and 8

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8
Q

Ratio 5

Name, Ratio, Unusual Range

A

Name: 2 year Overall Operation Ratio

Ratio = 2 year LR + 2 year Exp Ratio - 2 year Investment Income Ratio

Unusual Range: Over 100

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9
Q

Ratio 6

Name, Ratio, Unusual Range

A

Name: Investment Yield

Ratio = 2 * (Net investment income earned / Cash and invested assets between prior and current year)

Unusual Range: Over 5.5, Under 2

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10
Q

Ratio 7

Name, Ratio, Unusual Range

A

Name: Gross Change in PHS

Ratio: (Current PHS - Prior PHS) / Prior PHS

Unusual Range: Over 50, Under -10

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11
Q

Ratio 8

Name, Ratio, Unusual Range

A

Name: Change in Adjusted PHS

Ratio: (Current Adjusted PHS - Prior PHS) / Prior PHS

Unusual Range: Over 25, Under -10

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12
Q

Ratio 9

Name, Ratio, Unusual Range

A

Name: Adjusted Liabilities to Liquid Asset

Ratio: Adjusted Liabilities / Liquid Assets

Unusual Range: Over 100

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13
Q

Ratio 10

Name, Ratio, Unusual Range

A

Name: Gross Agent’s Balances to PHS

Ratio: Gross Agent’s balance in course of collection / PHS

Unusual Range: Over 40

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14
Q

What are the Liquidity Ratios

A

9, 10

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15
Q

What are the Reserve Ratios

A

11, 12, 13

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16
Q

Ratio 11

Name, Ratio, Unusual Range

A

Name: 1 year Reserve development to PHS

Ratio: 1 year Reserve development / Prior PHS

Unusual Range: Over 20

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17
Q

Ratio 12

Name, Ratio, Unusual Range

A

Name: 2 year reserve development to PHS

Ratio: 2 year reserve development / 2nd prior PHS

Unusual Range: Over 20

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18
Q

Ratio 13

Name, Ratio, Unusual Range

A

Name: Estimated Current Reserve Deficiency to PHS

Ratio: Estimated Deficiency / PHS

Unusual Range: Over 25

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19
Q

GWP for Ratio 1

A

Gross Written Premium =
Directed Written Premium
+ Reinsurance assumed from affiliates
+ Reinsurance assumed from non-affiliates

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20
Q

What is the ratio for Ratio 1 if PHS is 0 or negative, or if numerator is negative

A

999 if PHS is 0 or negative

0 if GWP is negative

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21
Q

What does Ratio 1 measure

A

the adequacy of surplus on a direct and assumed basis excluding the effects of ceded premium

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22
Q

What to consider if Ratio 1 is unusual

A

Compare to Ratio 2 (NWP: PHS)

The line of business of the insurer

Profitability of the insurer

% of assumed business versus direct

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23
Q

What does it mean if Ratio 1 is largely different than Ratio 2
And what to do

A

The insurer may be relying too heavily on reinsurance, or involved in a fronting arrangement

Investigate the quality, rating and collectability of reinsurance and the collateral held

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24
Q

What does a small difference between ratio 1 and ratio 2 mean

A

Sign that reinsurance protection is insufficient (especially if exposed to CAT risk)

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25
Q

What does it mean for Ratio 1 if the insurer writes long tail lines of business

A

The insurer should maintain lower ratios of GWP to surplus because it is harder to estimate losses for these lines

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26
Q

What does it mean for Ratio 1 if an insurer is profitable

A

More profitable with adequate reinsurance coverage can sustain higher ratio 1

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27
Q

What does Ratio 2 measure

A

Adequacy of surplus on a net basis

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28
Q

What to consider if Ratio 2 provides an unusual result

A

If insurer is a member of a group of affiliated companies

If the insurer is a profitable insurer

Is business in long tail lines

How adequate is reinsurance protection against large losses

Quality of reinsurers

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29
Q

What to consider if insurer is member of group of affiliated companies for Ratio 2

A

If the affiliated companies also have high ratios, then there is a problem with the insurers high ratio.

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30
Q

Ratio 2 and a high profitable insurer

A

Insurer can sustain higher ratio

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31
Q

Ratio 2 and long tailed lines of business

A

Ratio 2 should be kept lower for long tailed lines

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32
Q

What is ratio is Current and prior NWP are both 0 or negative for Ratio 3
What if Current NWP is positive and Prior NWP is negative

A

0

999

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33
Q

What does a large change in NWP indicate for Ratio 3

A

a lack of stability in the insurer’s operation

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34
Q

What can cause a large increase in Ratio 3

A
  • Abrupt entry into new lines or territories
  • Insurer may be attempting to increase cash flow to meet loss payments
    • be very concerned about this since increases risk of insolvency
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35
Q

Increased NWP does not necessarily mean greater change of insolvency when looking at Ratio 3 if (4 things)

A
  • low Ratio 2 (NPW: PHS ratio)
  • Adequate reserving (Ratios 11, 12, 13)
  • Profitable Operations (Ratio 5)
  • Stable product mix
36
Q

What can cause a large decrease in Ratio 3

A
  • sign of financial distress
  • pulling out of a line of business
  • reducing writing due to large losses in certain lines
  • loss of market share
  • higher amounts of reinsurance
37
Q

What would it mean if reduction in NWP accompanied by stable GWP. What ratio to determine this case

A

Insurer is trying to increase cash flow from ceding commission

Look at Ratio 4 (Surplus Aid)

38
Q

What does it mean if Ratio 3 produces unstable results from year to year, and what does it mean for the future

A

Insurer may not have good controls on its underwriting, or a solid business plan. And strong sign may run into trouble in the future

39
Q

What to analyze if Ratio 3 over years produce unstable results

A
  • Are assets properly valued and liquid enough to meet cash demands
  • Are reserves adequate (Ratio 11, 12, 13)
40
Q

Surplus Aid Calculation for Ratio 4
Ceding Commissions Ratio Calculation
Sum of Unearned Premium

A

Ceding Commissions Ratio * Sum of Ceded Unearned Premium (Non Affiliates)

Ceding Commision Ratio = Reinsurance ceded commissions (including contingent commissions) / Reinsurance premiums ceded (to affiliates and non affiliates)

Sum of Unearned Premium = Unearned premium from
- Authorized and Unauthorized Unaffiliated US Insurers
- Authorized and Unauthorized Non-US insurers
- Authorized and Unauthorized Mandatory & Voluntary Pools

41
Q

Ratio 4 if reinsurance premium ceded or surplus aid is 0 or negative

or surplus aid is positive and PHS is 0 or negative

A

0

999

42
Q

What does a high Ratio 4 indicate (issues)

A

Management may believe their surplus is inadequate

Surplus aid may improve the results of the other ratios where it conceals important areas of concern

43
Q

Should we be worried if Ratio 4 is high, but the other ratios performed fine?

A

Should scrutinize because surplus aid increase can conceal important areas of concern

44
Q

What should be done if Ratio 4 is unusual

A

Following ratios should be recalculated with surplus adjusted to completely remove the surplus aid form the denominator (numerators do not need to be recalculated)

  • Ratios 1 and 2
  • Ratio 7: Make sure to also remove the prior years surplus aid from prior years surplus amt
  • Ratio 10
  • Ratio 13
45
Q

2 year loss ratio for Ratio 5

A

Net Loss, LAE and Policyholder Dividends over 2 years /
Net premiums earned in 2 years

46
Q

2 year expense ratio for Ratio 5

A

(2 year other underwriting expense - 2 year other income) /
Net Premiums Written in 2 years

47
Q

2 year investment income ratio for Ratio 5

A

Net investment income earned over 2 years /
Net premiums earned in 2 years

48
Q

If Loss numerator + expense numerator - Investment income numerator is 0 or negative for Ratio 5,

or any denominator is 0 or negative

A

0

999

49
Q

What does ratio 5 measure and what can it help identify

A

The profitability of the insurer
Identify what is causing poor performance

50
Q

If losses are the cause of poor performance in ratio 5 what to look at and why

A

Ratio 11 and ratio 13
because reserve development or deficiency can distort the ratio

51
Q

If Ratio 11 is outside normal range what ratio needs to be recalculated and how

A

Ratio 5, after removing the prior year’s development

52
Q

Cash and Invested Assets between Current and prior year for Ratio 6

A

Current Year Cash and Invested Assets
+ Prior Yr Cash and invested assets
+ Current Yr Investment Income Due and Accrued
+ Prior Yr Investment Income Due and Accrued
- Current Yr Borrowed Money
- Prior Yr Borrowed Money
- Net Investment Income Earned

53
Q

Ratio 6 is capped at what

A

A minimum bound of 0

54
Q

What does Ratio 6 show, and what can it identify

A

Indicated the general quality of the investment portfolio

A risky, inefficient or expensive investment strategy

55
Q

What to look at if Ratio 6 is unusual

A

Types of Investments in Annual Statement, Schedules A-E

Exhibit of Net Investment Income

56
Q

What can cause low investment yields in Ratio 6

A
  • Speculative Investments
  • Large Investments in Affiliated Companies
  • Large Investments in Home Office Facilities
  • Large Investments in Tax Exempt Bonds
  • Significant Interest Payments on Borrowed Money
  • Extraordinarily High Investment Expenses
57
Q

Why might high yields be of concern in Ratio 6

A

Investing in high risk instruments

Extraordinary dividend payments from the subsidiary to the parent

58
Q

What does Ratio 7 show

A

The ultimate measure of the change in financial condition

59
Q

If the Current PHS is 0 or negative in Ratio 7
If Current PHS is positive and Prior PHS is 0 or negative

A

-99

999

60
Q

Why would Ratio 7 being unusually high be bad

A

Number of insolvent insurers experience large increases in surplus prior to the insolvencies, likely as a last ditch effort when in trouble

61
Q

Factors affecting changes in surplus include

A
  • Net gain or loss
  • Unrealized capital gains or losses
  • Change in surplus notes, capital paid in, and surplus paid in
  • Dividends to Stockholders
  • Changes in nonadmitted assets
  • Changes in surplus aid from reinsurance
  • accounting changes and corrections of errors
  • Change in DTA
  • Change in ownership
62
Q

Change in adjusted PHS in Ratio 8

A

PHS of the current year
- Changes in Surplus notes
- Capital Paid-in or Transferred
- Surplus Paid-in or Transferred
- PHS of the Prior Year

63
Q

If Current PHS is 0 or negative for Ratio 8
Or Current PHS is positive and Prior PHS is 0 or negative

A

-99

999

64
Q

What does Ratio 8 measure

A

The change in financial condition based on operational results, where subtracted items allow a view of surplus from actual operations

65
Q

Adjusted Liabilities in Ratio 9

A

Liabilities - Liabilities equal to Deferred Agent’s Balances

66
Q

Liquid Assets in Ratio 9
and what consists of Liquid Assets

A

Liquid Assest - Investments in parents, subsidiaries, affiliates

Liquid assets consist of: Bonds, Stocks, Cash, Cash-Equivalents, Short Term Investments, Receivables for Securities, and Investment Income Due and Accrued

67
Q

If Liquid Assets is 0 or negative in Ratio 9

A

999

68
Q

What are the two things Ratio 9 does

A
  • Measures the insurer’s ability to meet the financial demands
  • Provides rough indication of the possible implications for policyholders if liquidation is necessary
69
Q

Why should analysts be concerned about companies with high ratios or increasing Ratio 9

A

Many insurers which became insolvent had high ratios of liabilities of assets prior to their insolvencies

70
Q

Why is deferred agent’s balances excluded from the liability in Ratio 9

A

They are not liquid, so to have a fair comparison between Liquid Assets

71
Q

What should analyst focus on if insurer has high Ratio 9

A

Reserve adequacy and if insurer has right valuation, mix and liquidity of assets in order to determine if the insurer can meet it’s obligations

72
Q

If Gross A.B. in Course of Collection is 0 or negative in Ratio 9
If Gross A.B. in Course of collection is positive, but PHS is 0 or negative

A

0

999

Gross Agents Balances

73
Q

Why are Gross Agents balances analyzed in Ratio 9

A

Because they usually cannot be converted to cash in the event of a liquidation

74
Q

Where is Reserve development pulled from for Ratios 11 and 12
Is it net or gross and of what

A

Schedule P, Part 2

Includes Prior Years row, so net of salvage & Subrogation, and gross of discounts

75
Q

If 1 year reserve development is positive, and Prior PHS is 0 or negative in Ratio 11

A

999

76
Q

What do Ratio 11 and Ratio 12 measure

A

Loss development over a 1 year (Ratio 11) and 2 year (Ratio 12) period

77
Q

What to look at if there is significant adverse development in Ratio 11 and 12

A

Focus on which lines and accident years caused the development

78
Q

What does it mean if Ratio 11 or 12 is consistently showing adverse development

A

Insurer may be intentionally understating its reserves, and therefore deficiencies are arising as losses are paid

79
Q

What does it mean if Ratio 12 is consistently greater than Ratio 11

A

Insurer may be intentionally understating its reserves, and therefore deficiencies are arising as losses are paid

80
Q

Estimated Deficiency from Ratio 13
With other sub-calculations

A

Estimated Deficiency = Reserve Required - Current Reserves

Reserve Required = Premiums earned * Ratio of Reserves to Premium

Ratio of Reserves to Premium = Average( Reserves to premium from prior year, Reservers to premium from 2nd prior year)

Reserves to Premium from Prior Year = (Reserves from prior year + 1 year loss development) / Premiums Earned in prior year

Reserves to Premium from 2nd prior year = (Reserves from 2nd prior year + 2 year loss development) / Premiums Earned in 2nd prior year

81
Q

If Deficiency is positive, and PHS is 0 or negative Ratio 13
If Deficiency and PHS are both 0 or negative

A

999

0

82
Q

What does ratio 13 measure

A

the adequacy of current reserves

83
Q

Why will ratio 13 be distorted due to changes in the exposure

A

There is a mismatch in the reserves to premium ratio (numerator is based on reserves from all accident years, denominator is the premium from current accident years)

84
Q

What distortion will occur in Ratio 13 if there are significant changes in premium volume

A

An increase in premium will show a deficiency greater than the true number

85
Q

What distortion will occur in Ratio 13 if there is a shift in product mix

For shift in product mix, what should likely be done?

A

A shift from property to liability lines will understate the deficiency

In the case of shift in product mix, may be good idea to calculate the ratio separately by line

Exam 6 (31 decks)

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