Part 14 (NAIC IRIS and Odomirok 20) (****) Flashcards
What are IRIS tests used for
Used by regulators to identify insurers that are in need of regulatory attention
Ratio 1
Name, Ratio, Unusual Range
Name: GWP to PHS
Ratio = GWP / PHS
Unusual Range: Over 900
Ratio 2
Name, Ratio, Unusual Range
Name: NWP to PHS
Ratio: NWP / PHS
Unusual Range: Over 300
Ratio 3
Name, Ratio, Unusual Range
Name: Change in NWP
Ratio = (Current NWP - Prior NWP) / Prior NWP
Unusual Range: Over 33, Under -33
Ratio 4
Name, Ratio, Unusual Range
Name: Surplus Aid to PHS
Ratio = Surplus Aid / PHS
where surplus aid = Ceding commissions % * UEPR
Unusual Range: Over 15
What are the Overall Ratios
1, 2, 3, and 4
What are the Profitability Ratios
5, 6, 7, and 8
Ratio 5
Name, Ratio, Unusual Range
Name: 2 year Overall Operation Ratio
Ratio = 2 year LR + 2 year Exp Ratio - 2 year Investment Income Ratio
Unusual Range: Over 100
Ratio 6
Name, Ratio, Unusual Range
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
Ratio 7
Name, Ratio, Unusual Range
Name: Gross Change in PHS
Ratio: (Current PHS - Prior PHS) / Prior PHS
Unusual Range: Over 50, Under -10
Ratio 8
Name, Ratio, Unusual Range
Name: Change in Adjusted PHS
Ratio: (Current Adjusted PHS - Prior PHS) / Prior PHS
Unusual Range: Over 25, Under -10
Ratio 9
Name, Ratio, Unusual Range
Name: Adjusted Liabilities to Liquid Asset
Ratio: Adjusted Liabilities / Liquid Assets
Unusual Range: Over 100
Ratio 10
Name, Ratio, Unusual Range
Name: Gross Agent’s Balances to PHS
Ratio: Gross Agent’s balance in course of collection / PHS
Unusual Range: Over 40
What are the Liquidity Ratios
9, 10
What are the Reserve Ratios
11, 12, 13
Ratio 11
Name, Ratio, Unusual Range
Name: 1 year Reserve development to PHS
Ratio: 1 year Reserve development / Prior PHS
Unusual Range: Over 20
Ratio 12
Name, Ratio, Unusual Range
Name: 2 year reserve development to PHS
Ratio: 2 year reserve development / 2nd prior PHS
Unusual Range: Over 20
Ratio 13
Name, Ratio, Unusual Range
Name: Estimated Current Reserve Deficiency to PHS
Ratio: Estimated Deficiency / PHS
Unusual Range: Over 25
GWP for Ratio 1
Gross Written Premium =
Directed Written Premium
+ Reinsurance assumed from affiliates
+ Reinsurance assumed from non-affiliates
What is the ratio for Ratio 1 if PHS is 0 or negative, or if numerator is negative
999 if PHS is 0 or negative
0 if GWP is negative
What does Ratio 1 measure
the adequacy of surplus on a direct and assumed basis excluding the effects of ceded premium
What to consider if Ratio 1 is unusual
Compare to Ratio 2 (NWP: PHS)
The line of business of the insurer
Profitability of the insurer
% of assumed business versus direct
What does it mean if Ratio 1 is largely different than Ratio 2
And what to do
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
What does a small difference between ratio 1 and ratio 2 mean
Sign that reinsurance protection is insufficient (especially if exposed to CAT risk)
What does it mean for Ratio 1 if the insurer writes long tail lines of business
The insurer should maintain lower ratios of GWP to surplus because it is harder to estimate losses for these lines
What does it mean for Ratio 1 if an insurer is profitable
More profitable with adequate reinsurance coverage can sustain higher ratio 1
What does Ratio 2 measure
Adequacy of surplus on a net basis
What to consider if Ratio 2 provides an unusual result
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
What to consider if insurer is member of group of affiliated companies for Ratio 2
If the affiliated companies also have high ratios, then there is a problem with the insurers high ratio.
Ratio 2 and a high profitable insurer
Insurer can sustain higher ratio
Ratio 2 and long tailed lines of business
Ratio 2 should be kept lower for long tailed lines
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
0
999
What does a large change in NWP indicate for Ratio 3
a lack of stability in the insurer’s operation
What can cause a large increase in Ratio 3
- 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
Increased NWP does not necessarily mean greater change of insolvency when looking at Ratio 3 if (4 things)
- low Ratio 2 (NPW: PHS ratio)
- Adequate reserving (Ratios 11, 12, 13)
- Profitable Operations (Ratio 5)
- Stable product mix
What can cause a large decrease in Ratio 3
- 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
What would it mean if reduction in NWP accompanied by stable GWP. What ratio to determine this case
Insurer is trying to increase cash flow from ceding commission
Look at Ratio 4 (Surplus Aid)
What does it mean if Ratio 3 produces unstable results from year to year, and what does it mean for the future
Insurer may not have good controls on its underwriting, or a solid business plan. And strong sign may run into trouble in the future
What to analyze if Ratio 3 over years produce unstable results
- Are assets properly valued and liquid enough to meet cash demands
- Are reserves adequate (Ratio 11, 12, 13)
Surplus Aid Calculation for Ratio 4
Ceding Commissions Ratio Calculation
Sum of Unearned Premium
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
Ratio 4 if reinsurance premium ceded or surplus aid is 0 or negative
or surplus aid is positive and PHS is 0 or negative
0
999
What does a high Ratio 4 indicate (issues)
Management may believe their surplus is inadequate
Surplus aid may improve the results of the other ratios where it conceals important areas of concern
Should we be worried if Ratio 4 is high, but the other ratios performed fine?
Should scrutinize because surplus aid increase can conceal important areas of concern
What should be done if Ratio 4 is unusual
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
2 year loss ratio for Ratio 5
Net Loss, LAE and Policyholder Dividends over 2 years /
Net premiums earned in 2 years
2 year expense ratio for Ratio 5
(2 year other underwriting expense - 2 year other income) /
Net Premiums Written in 2 years
2 year investment income ratio for Ratio 5
Net investment income earned over 2 years /
Net premiums earned in 2 years
If Loss numerator + expense numerator - Investment income numerator is 0 or negative for Ratio 5,
or any denominator is 0 or negative
0
999
What does ratio 5 measure and what can it help identify
The profitability of the insurer
Identify what is causing poor performance
If losses are the cause of poor performance in ratio 5 what to look at and why
Ratio 11 and ratio 13
because reserve development or deficiency can distort the ratio
If Ratio 11 is outside normal range what ratio needs to be recalculated and how
Ratio 5, after removing the prior year’s development
Cash and Invested Assets between Current and prior year for Ratio 6
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
Ratio 6 is capped at what
A minimum bound of 0
What does Ratio 6 show, and what can it identify
Indicated the general quality of the investment portfolio
A risky, inefficient or expensive investment strategy
What to look at if Ratio 6 is unusual
Types of Investments in Annual Statement, Schedules A-E
Exhibit of Net Investment Income
What can cause low investment yields in Ratio 6
- 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
Why might high yields be of concern in Ratio 6
Investing in high risk instruments
Extraordinary dividend payments from the subsidiary to the parent
What does Ratio 7 show
The ultimate measure of the change in financial condition
If the Current PHS is 0 or negative in Ratio 7
If Current PHS is positive and Prior PHS is 0 or negative
-99
999
Why would Ratio 7 being unusually high be bad
Number of insolvent insurers experience large increases in surplus prior to the insolvencies, likely as a last ditch effort when in trouble
Factors affecting changes in surplus include
- 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
Change in adjusted PHS in Ratio 8
PHS of the current year
- Changes in Surplus notes
- Capital Paid-in or Transferred
- Surplus Paid-in or Transferred
- PHS of the Prior Year
If Current PHS is 0 or negative for Ratio 8
Or Current PHS is positive and Prior PHS is 0 or negative
-99
999
What does Ratio 8 measure
The change in financial condition based on operational results, where subtracted items allow a view of surplus from actual operations
Adjusted Liabilities in Ratio 9
Liabilities - Liabilities equal to Deferred Agent’s Balances
Liquid Assets in Ratio 9
and what consists of Liquid Assets
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
If Liquid Assets is 0 or negative in Ratio 9
999
What are the two things Ratio 9 does
- Measures the insurer’s ability to meet the financial demands
- Provides rough indication of the possible implications for policyholders if liquidation is necessary
Why should analysts be concerned about companies with high ratios or increasing Ratio 9
Many insurers which became insolvent had high ratios of liabilities of assets prior to their insolvencies
Why is deferred agent’s balances excluded from the liability in Ratio 9
They are not liquid, so to have a fair comparison between Liquid Assets
What should analyst focus on if insurer has high Ratio 9
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
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
0
999
Gross Agents Balances
Why are Gross Agents balances analyzed in Ratio 9
Because they usually cannot be converted to cash in the event of a liquidation
Where is Reserve development pulled from for Ratios 11 and 12
Is it net or gross and of what
Schedule P, Part 2
Includes Prior Years row, so net of salvage & Subrogation, and gross of discounts
If 1 year reserve development is positive, and Prior PHS is 0 or negative in Ratio 11
999
What do Ratio 11 and Ratio 12 measure
Loss development over a 1 year (Ratio 11) and 2 year (Ratio 12) period
What to look at if there is significant adverse development in Ratio 11 and 12
Focus on which lines and accident years caused the development
What does it mean if Ratio 11 or 12 is consistently showing adverse development
Insurer may be intentionally understating its reserves, and therefore deficiencies are arising as losses are paid
What does it mean if Ratio 12 is consistently greater than Ratio 11
Insurer may be intentionally understating its reserves, and therefore deficiencies are arising as losses are paid
Estimated Deficiency from Ratio 13
With other sub-calculations
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
If Deficiency is positive, and PHS is 0 or negative Ratio 13
If Deficiency and PHS are both 0 or negative
999
0
What does ratio 13 measure
the adequacy of current reserves
Why will ratio 13 be distorted due to changes in the exposure
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)
What distortion will occur in Ratio 13 if there are significant changes in premium volume
An increase in premium will show a deficiency greater than the true number
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 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
