IRIS

Question 1

Overall Ratios

Answer 1

IRIS 1: GWP / Surplus <= 900%
IRIS 2: NWP / Surplus <= 300%
IRIS 3: Change(NWP) / Prior Year NWP [-33%, 33%]
IRIS 4: Surplus Aid / Surplus < 15%

Question 2

interpret a HIGH value for IRIS 1

Answer 2

based on GWP: HIGH → more risk in relation to surplus
- surplus is a cushion for absorbing losses

Question 3

interpret a HIGH value for IRIS 2

Answer 3

based on NWP: HIGH → more risk in relation to surplus
- surplus is a cushion for absorbing losses
- the unusual range is stricter than for IRIS1

Question 4

interpret a HIGH or LOW value for IRIS 3

Answer 4

based on NWP: HIGH (or LOW) → potential lack of stability in operations
- HIGH ratio could mean less strict U/W requirements or writing a new line

Question 5

interpret a HIGH value for IRIS 4

Answer 5

based on surplus aid: HIGH → policyholder’s surplus may be inadequate

Question 6

IRIS 4

Answer 6

Surplus Aid / Surplus < 15%
Ceding Commissions Ratio * Unearned Premium - Non-affiliates
Other US Unaffiliated Insurers, Mandatory & Voluntary Pools, Certified Other Non-US Insurers

High: Indicates surplus is inadequate, may conceal areas of concern, may indicate excessive reinsurance & collectability risk

Recalc 1, 2, 7, 10, 13

Question 7

Profitability Ratios

Answer 7

IRIS 5: 2-yr Operating Ratio < 100%
IRIS 6: Investment Yield (2%, 5.5%)
IRIS 7: Change(Surplus) / Prior Year Surplus (-10%, 50%)
IRIS 8: Adjusted Surplus / Prior Year Surplus (-10%, 25%)

Question 8

IRIS 5

Answer 8

2-yr Operating Ratio < 100%
= 2-yr Loss Ratio + 2-yr Expense Ratio - 2-yr IIR
IIR = Investment Income Ratio
< 100%
Recalc if IRIS 11 outside usual range
Losses, Loss Adjustment Expenses, & Policyholder Dividends / Premiums Earned
Other Underwriting Expenses Less Other Income / Net Premiums Written
Investment Income Earned / Premiums Earned

Question 9

IRIS 6

Answer 9

Investment Yield (2%, 5.5%)
= 2 * (NII earned) / Avg Cash & Invested Assets, Current & Prior Year
NII = Net Investment Income
+ Total Cash & Invested Assets, + Investment Inc. Due & Accrd, - Borrowed Money

Low: Speculative instruments providing capital gain but no interim income
High: High-risk instruments (may leverage surplus unduly)

Question 10

IRIS 7

Answer 10

Change(Surplus) / Prior Year Surplus (-10%, 50%)

Low: Decrease in net income
High: Insurers often have increase in surplus before insolvency

Question 11

IRIS 8

Answer 11

Adjusted Surplus / Prior Year Surplus (-10%, 25%)
Adjusted Surplus = Policyholders’ Surplus (Current Yr) - Change in Surplus Notes - Capital Paid-in or Transferred - Surplus Paid-in or Transferred - Policyholders’ Surplus (Prior Yr)

Question 12

interpret a LOW value for IRIS 5

Answer 12

LOW → better operating profit

Question 13

interpret a LOW or HIGH value for IRIS 6

Answer 13

LOW → multiple potential causes
Ex: investments are providing capital gains but no interim income
HIGH → investments are HIGH risk

Question 14

interpret a LOW or HIGH value for IRIS 7

Answer 14

LOW → dangerous surplus decrease
- may be caused by decrease in net income
HIGH → possible insolvency
- surplus often goes up before insolvency

Question 15

interpret a LOW (HIGH) value for IRIS 8

Answer 15

LOW (HIGH) → deterioration (improvement) in financial condition due to operations

Question 16

if the current year COR = 125%, why might IRIS 5 be outside of the usual range (be sure to also state the usual range)

Answer 16

• IRIS 5 usual range is < 100%
• recall that IRIS 5 is the 2-year COR (Combined Operating Ratio)
  → if the 1-year COR is 125%
  then the prior year COR would be have to be unreasonably low to keep IRIS 5 below 100%

Question 17

describe the purpose of IRIS 5

Answer 17

to identify companies that are operating unprofitably

Question 18

Liquidity Ratios

Answer 18

IRIS 9: Adjusted Liabilities / Liquid Assets < 100%
IRIS 10: Gross Agents’ Balances in Collection / Surplus < 40%

Question 19

IRIS 9

Answer 19

Adjusted Liabilities / Liquid Assets < 100%
Adjusted Liabilities = Total Liabilities - Liabilites Equal to Deferred Agents’ Balances
Liquid Assets = Bonds + Stocks + Cash, Cash Equivalents & Short-Term Investments + Receivable for Securities + Investment Income Due & Accrued - Investments in Parent, Subsidiaries, & Affiliates

Insolvent insurers often have high ratios prior to insolvency
Consider trend over prior years

Question 20

IRIS 10

Answer 20

Gross Agents’ Balances in Collection / Surplus < 40%
High: Agents may be slow in paying; balances > 90 days overdue may need to be removed from admitted assets

Question 21

interpret a HIGH value for IRIS 9

Answer 21

HIGH → trouble meeting short-term obligations

Question 22

interpret a HIGH value for IRIS 10

Answer 22

HIGH → agents may be slow in paying

Question 23

Reserve Ratios

Answer 23

IRIS 11: 1-yr loss reserve development < 20%
IRIS 12: 2-yr loss reserve development < 20%
IRIS 13: Estimated reserve deficiency < 25%

Question 24

IRIS 11

Answer 24

1-yr loss reserve development / Surplus (Prior Yr) < 20%

Question 25

IRIS 12

Answer 25

2-yr loss reserve development / Surplus (2nd Prior Yr) < 20%

Question 26

IRIS 13

Answer 26

Estimated reserve deficiency (redundancy) / Surplus < 25% Premiums Earned (Current) * Avg Ratio of Reserves to Premiums (Preliminary Ratio) Preliminary Ratio = Average[(Loss & LAE Reserves (Prior) + 1-yr loss reserve development)/Premiums Earned (Prior), (Loss & LAE Reserves (2nd Prior) + 2-yr loss reserve development)/Premiums Earned (2nd Prior) Affected by changes in mix, premium volume

Question 27

interpret a POSITIVE (NEGATIVE) value for IRIS 11

Answer 27

POSITIVE (NEGATIVE) → reserve deficiency (redundancy) - isolate the LOB causing this using Schedule P - Part 2 (ultimate losses)

Question 28

interpret a POSITIVE (NEGATIVE) value for IRIS 12

Answer 28

POSITIVE (NEGATIVE) → reserve deficiency (redundancy) - isolate the LOB causing this using Schedule P - Part 2 (ultimate losses)

Question 29

interpret a POSITIVE (NEGATIVE) value for IRIS 13

Answer 29

POSITIVE (NEGATIVE) → reserve deficiency (redundancy) - affected by changes in mix, premium volume - good test for correction of reserve deficiencies

Question 30

describe how 2 schedules/exhibits in the ann. stmt. (other than the B/S) can be used to analyze liquidity

Answer 30

examiner's report gave 16 different answers - almost every part of the ann. stmt. can be used to analyze liquidity - you just have to explain how here are a few the answers given: INCOME STATEMENT → shows profitability and higher profitabiity can reduce liquidity concerns Schedule D → shows bonds and bonds can reduce liquidity concerns due to regular coupon payments Schedule F → shows reinsurance and excessive reinsurance without collateral can raise liquidity concerns Schedule P → shows los developemnt and favorable loss development can reduce liquity concerns

Question 31

based on IRIS 11 & 13, why might a regulator be concerned with the financial health of this company

Answer 31

IRIS 11: - unusual reserve development may not be supported by premiums which are decreasing/flat IRIS 13: - affected by mix changes and premium growth/shrinkage so unusual value may indicate operation instability

Question 32

identify 2 ways IRIS 13 can be distorted

Answer 32

changes in: - volume - mix - reserve strengthening or weakening - reinsurance commutation

Question 33

identify 2 solvency analysis tools & a limitation of each (other than IRIS & RBC)

Answer 33

SAO * Limitation is that SAO does not contain Actuary's estimate so it may provide less info than required. * This only addresses reserve adequacy, not a holistic evaluation of financial impairment AOS * This tool is confidential

Question 34

identify considerations in analyzing IRIS 1 (3)

Answer 34

- disparity between IRIS 1 & 2 (make sure it isn't too LARGE) - disparity between IRIS 1 & 2 (make sure it isn't too SMALL indicating lack of reinsurance) - amount of direct vs assumed business (insurer has more control over direct business)

Question 35

identify considerations in analyzing IRIS 2 (3)

Answer 35

- look at IRIS 2 on consolidated basis (if insurer is an affiliate) - look at reserve adequacy (less concern if reserves are adequate) - look at profitability (less concern if insurer is profitable)

Question 36

identify considerations in analyzing IRIS 3 (3)

Answer 36

- are assets properly valued & sufficiently liquid - look at profitability (higher IRIS 3 ratio may be ok if insurer is profitable) - look at mix of business (need a lower ratio for long-tailed lines)