4. IRIS

Question 1

NAIC Analyst team system

Financial examiners review IRIS & RBC & place company into 1 of 3 levels

Answer 1

A : YES require immediate action

B : NO require immediate action but potential adverse results

No attention needed

Question 2

Answer 2

Question 3

IRIS Ratio 1 (5)

formula

unusual range

unusual means?

GWP =?

if negative GWP then IRIS 1 = ?

Answer 3

1. GWP/PHS
2. Unusual>=900
3. Unusual means surplus inadequate to absorb losses before reinsurance
4. GWP = DWP + Reinsurance assumed from affiliates + reinsurance assumed from NONaffiliates
5. If Negative GWP THEN IRIS 1 ratio = 0

Question 4

IRIS Ratio 2

formula

unusual range

unusual means?

if negative GWP then IRIS 1 = ?

Answer 4

1. NWP/PHS
2. Unusual>=300
3. Unusual means surplus inadequate to absorb losses after reinsurance
4. If Negative NWP THEN IRIS 2 ratio = 0

Question 5

IRIS 1 & 2 Considerations

large differences means?

longer tail LOB implications

mostly assumed GWP implications

IRIS 5 implications

pooling arrangemtn implications

Answer 5

1. If IRIS ratio 1 and 2 are VERY different than relying too much on reinsurance?
2. Longer tail LOB are more volatile → need lower ratios
3. If GWP is mostly assumed (insurers have less control over assumed)→ Need lower IRIS ratio 1
4. Insurers w/ favorable IRIS ratio 5 (good profit) & adequate reinsurance can have higher IRIS ratio 1
5. Pooling arrangements distort IRIS Ratio 1

Question 6

Answer 6

Question 7

IRIS Ratio 3

formula

unusual range

unusual means?

other

other

Answer 7

1. (Current Year NWP - Prior Year NWP) / Prior Year NWP
2. Unusual>=33 or <=33
3. Unusual means rapid growth on purpose by relaxing UW to increase cash flow or financial distress
4. Unstable year-over-year results may indicate lack of control over business strategy
5. Reasonable IRIS ratio 2,5,11-13 can make unusual IRIS ratio 3 okay

Question 8

Answer 8

Question 9

IRIS Ratio 4

formula

unusual range

unusual means?

unusual range can be caused by

if unusual then?

Answer 9

1. Surplus Aid / PHS Current
2. -Surplus Aid = (ceding commission / ceded prem) * (UEPR from non-affiliates)
3. -Ceding commission = reinsurance ceded commissions + reinsurance ceded contingent commission
4. -Ceded premium = reinsurance prem ceded from affiliates** + reinsurance prem ceded from **NON-affiliates
5. -UEPR from non-affiliates=UEP on other US unaffiliated insurers + UEP on mandatory/voluntary pools + UEP on other non-US insurers
6. Unusual>=15
7. Unusual means relying on surplus aid (ceding commissions) to boost PHS?
8. Unusual can be caused by inadequate PHS, too much reinsurance (collectability risk), or high reinsurance commission rate?
9. If unusual then subtract surplus aid from PHS in denominator of IRIS ratios 1,2,7,10,13 [PHS (1-Surpus Aid %)]

Question 10

Answer 10

Question 11

Answer 11

Question 12

Answer 12

Question 13

Answer 13

Question 14

IRIS Ratio 5

formula

unusual range

unusual means?

unusual range can be caused by

if unusual then?

Answer 14

1. 2 yr overall operating Ratio = 2 yr LR + 2 yr expense ratio - 2 yr investment ratio
2. 2 yr LR = [2 yr L&LAE incurred + 2 yr policyholder dividends] / 2 yr EP
3. 2 yr expense ratio = [2 yr other UW expense - 2 yr other income] / 2 yr NWP
4. 2 yr investment ratio = 2 yr InvInc earned / 2 yr EP
5. Unusual>=100
6. unusual means low profitability caused by high loss ratio or high expense ratio or low investment ratio
   * 7. High losses from cats or poor loss development?*
   * 8. High expenses caused by commission and brokerage or salaries and operating expenses?*
   * 9. Low investment ratio causes by low investment yields (IRIS 6)*
7. If unusual then look at IRIS 13 (reserve adequacy) or recalc IRIS 5 after removing prior yr development as calculated in IRIS 11

Question 15

Answer 15

Question 16

IRIS Ratio 6

formula

unusual range

high unsual means

low unusual means

Answer 16

1. Investment yield = Max(0, net investment income earned/ avg cash & invested asset of current & prior yr)
2. Denominator = ½ [+ total cash & invested assets (both yrs) + investment income due & accrued (both yrs) - borrowed money (both yrs) - net investment income earned]
3. Unusual is >6.5% or <3.0%
4. High unusual means high risk instruments or extraordinary dividends
5. Low unusual means speculative investments (low income now but high later), high tax exempt bonds, high interest on borrowed $, high investment expenses

Question 17

Answer 17

Question 18

IRIS Ratio 7

formula

unsual range

meansures?

cause of high unusual range

cause of low unusual range

Answer 18

1. ∆ in surplus / prior surplus
2. Unusual is <= negative 10% or >=+50%
3. Measures change in financial position (does not account for insurers contributing capital to cover up change to surplus)
4. Cause of unusual high value= under-reserve to avoid insolvency, growth, merger
5. Cause of unusual low value =cats, losing money (IRIS 5), consider IRIS 4 (surplus aid), consider IRIS 8 (change in surplus notes or captial paid-in or surplus paid-in)

Question 19

Answer 19

Question 20

IRIS Ratio 8

formula

unsual range

meansures?

cause of high unusual range

cause of low unusual range

Answer 20

1. (∆ in surplus - ∆ in surplus notes - surplus paid in - capital paid in) / prior surplus
2. Unusual is <= negative 10% or >=+20%
3. Measures change in financial position based on operational results (accounts for insurers contributing capital to cover up change to surplus)
4. Cause of unusual high value= underserve to avoid insolvency, growth, merger
5. Cause of unusual low value= cats, losing money (IRIS 5)

Question 21

IRIS Ratio 9

formula

unsusual range

unusual means

other

Answer 21

1. Adjusted lib / liquid assets
2. Adjusted liab = total liab - deferred agent balances
3. Liquid assets = bonds + stocks +cash + receivables + interest due & accrued - investment in parents/subsid/affiliates
4. Unusual is >= 100%
5. Unusual means low inability to meet short term obligations
6. Deferred agent balances are removed bc not liquid
7. Bonds include at book/adjusted carrying value
8. If unusual then consider prior IRIS 9 trending up?, reserve adequacy, asset values, mix, liquidity
9. Skewed up when large deposits w/ reinsured companies? liquid assets down

Question 22

IRIS Ratio 10

formula

unsusual range

measures

Answer 22

1. Gross Agents Balances in course of collection / PHS
2. Unusual is >= 40%
3. How dependent PHS is to assets that may not be collectible if go insolvent

Question 23

Answer 23

Question 24

IRIS Ratio 11

formula

unusual #

unusual means?

Answer 24

1. 1 yr development / PHS prior yr

2. Unusual is >= 20%

3. Unusual means reserve deficiency on 1 yr development basis

Question 25

Answer 25

Question 26

_IRIS Ratio 12_ formula unusual# unusual means?

Answer 26

1. 2 yr development / PHS 2nd prior yr **2. Unusual is \>= 20%** 3. Unusual means reserve deficiency on 2 yr development basis

Question 27

_IRIS 11 & 12 considerations_ positive ratio means vs negative ratio means? unusual range means _numerator is high_ due to? unusual range means _denominator is low_ due to? considerations (2) exhibit to caculate IRIS 11 & 12?

Answer 27

1. Positive ratio means deficiency & negative ratio means redundancy 2. Unusual range means numerator is high due to loss rsv strengthening, write off uncollectible reinsurance losses, commutation of reinsurance 3. unusual range means denominator is low bc change in tabular discounts 4. Which LOB/AY is issue? Look at Schedule P part 2 5. prior unusual IRIS 11 and 12 ? intentional understating loss rsvs 6. 5 yr historical exhibit

Question 28

_IRIS Ratio 13_ formula unusual range unusual means? what *overstates* IRIS Ratio 13 what *understates* IRIS Ratio 13

Answer 28

1. estimated L&LAE reserve deficiency or redundancy/ PHS current yr 2. numerator = estimated required rsvs – current rsvs 3. numerator = current EP(Preliminary Ratio) – current rsvs 4. PR = avg (developed L& LAE rsvs prior yr / EP prior yr), (developed L&LAE rsvs 2^nd prior yr/ E{ 2^nd prior yr) 5. developed L& LAE rsvs prior yr = L&LAE rsvs prior yr+1 yr loss rsv development 6. developed L& LAE rsvs 2^nd prior yr = L&LAE rsvs 2^nd prior yr+2 yr loss rsv development **7. Unusual is \>= 25%** 8. Unusual means current rsvs are inadequate 9. Big premium increase overstates IRIS 13 (numerator ↑) 10. Big shift to liability LOB understates IRIS 13 as development is delayed (PR ↓)

Question 29

Answer 29

Question 30

Answer 30

Question 31

Answer 31

Question 32

Answer 32