IRIS

Question 1

IRIS tests are used

Answer 1

by regulators to identify insurers that are in need of regulatory attention, ratio calc is compared to normal range

Question 2

individual ratio should not be reviewed in isolation

Answer 2

result of other ratios in addition to other pertinent info should be considered

Question 3

Ratio1: GWP:PHS

Answer 3

GWP = direct WP+reins assumed

PHS = ending surplus

-measures adequacy of surplus on direct and assumed basis excl effects of ceded prem

>9 is unusual

if high, compare to ratio2 (if large variance, may be relying too heavily on reins or involved in fronting agreement or small diff then sign that reins protection is insuff), consider LOB (if long tailed, should maintain lower ratios bc harder to estimate losses), consider profitability (insurers that are profitable and have adequate reins coverage can sustain higher ratios), % of assumed business (insurer has less control over business it assumes so if large portion should review and understand)

Question 4

Ratio2: NWP:PHS

Answer 4

• measures adequacy of surplus on net basis
• measures adequacy of surplus on net basis
• >3 is unusual
• if high, consider LOB (if long tailed, should maintain lower ratios bc harder to estimate losses), consider profitability (insurers that are profitable can sustain higher ratios), quality of reinsurers, adequacy of reinsurance protection against large losses, whether a member of group of affiliated companies (high ratio for insurer

Question 5

Ratio3: Change in Net Writings

Answer 5

R3=(Curr NWP-Prior NWP)/Prior NWP

• >0.33 or <-0.33 is unusual
• large change may indicate lack of stability in operations
• large increase in prem can be caused by abrupt entry into new lines or territories or insurer attempting to increase cash flow to meet loss payments
• unstable results yr to yr indicates that insurer may not have good controls on its UW or solid business plan, if so good chance insurer is going to run into trouble in future

Question 6

not greater chance of insolvency if increase in NWP is accompanied by

Answer 6

low ratio2, adequate reserving, profitable operations, and stable product mix

Question 7

reduction in NWP accompanied by relatively stable GWP may indicate

Answer 7

that insurer is trying to increase cash flow from ceding commissions -> look at surplus aid to determine

Question 8

Ratio4: Surplus Aid:PHS

Answer 8

Surplus Aid=ceding comm ratio*ceded UEP (xAffiliates)

Ceding comm ratio=reins ceded comm/reins prem ceded

• intended to identify companies that rely heavily on reinsurance as means to enhance surplus
• >0.15 is unusual
• if high ratio, may indicate management believes surplus is inadequate or surplus aid may improve results of other ratios to such degree that it conceals important areas of concern
• if outside normal range, important to use careful scrutiny even if well in other ratios and ratios should be recalc with surplus adjusted to completely remove surplus aid

Ratios 1&2, gross change in PHS (7), gross agents balance:PHS (10), estimated curr reserve deficiency to PHS (13)

Question 9

Ratio5: 2 yr overall operating ratio

Answer 9

R5=LR+Expense ratio-Investment income ratio

LR=Loss, LAE, PH dividends/EP

ExpR=other UW exp & write ins-other income/NWP

IIR=net investment income earned/EP

• measures profitability of insurer, can help identify what is causing poor performance, 2yrs used to smooth unusual fluctuations
• >1 is unusual
• if losses are cause of poor performance, should look at 1yr reserve development to PHS (11) and estimated curr reserve deficiency to PHS (13) because reserve development or deficiency can distort ratio
• if outside range for ratio11, recalc ratio5 removing prior yr development

Question 10

Ratio6: investment yield

Answer 10

R6=2*(net investment income earned/cash&invested assets btw curr and prior yr)

Denom=cash&invested assets (prior&curr) + investment income due&accrued (prior&curr) –borrowed money (prior&curr) – net investment income earned

usual range >0.03 & <0.065

• indicates general quality of investment portfolio and can possibly identify risky, inefficient or expensive investment strategy
• if high or low yield, should look at types of investments in AS and exhibit of net investment income

Question 11

Ratio7: gross change in PHS

Answer 11

R7=change in PHS/prior PHS

• ultimate measure of change in financial condition
• unusual range: >50% & <-10%
• too high ratios (>50%) may warrant investigation bc # of insolvent companies experience large increases in surplus prior to insolvency

Question 12

factors affecting changes in surplus

Answer 12

=net gain/loss, unrealized capital gains/losses, change in surplus notes, capital paid in, & surplus paid in, stockholder dividends, changes in nonadmitted assets, changes in surplus aid from reins, accounting changes and corrections of errors, change in DTA, change in ownership

Question 13

Ratio8: net change in adjusted PHS

Answer 13

R8=change in adjusted PHS/prior PHS

change in adjusted PHS=Curr yr PHS-changes in surplus notes-capital paid in/transferred-surplus paid in/transferred – PHS prior yr

• ratio measures change in financial condition based on operational results
• unusual range: >25% & <-10%
• adjusted PHS in order to determine change in surplus from actual operations

Question 14

Ratio9: adjusted liabilities:liquid assets

Answer 14

Adj liabilities=liab-liab equal to deferred agents’ balances

Liquid assets=liquid assets-investments in parents, sub, affiliates

Incl bonds, stocks, cash-equiv, short term investments, receivables for securities and investment income due and accrued

• measures ability to meet financial demands and provides rough indication of possible implications for PHs if liquidation is necessary
• unusual range: >100%
• many insolvents had high ratios prior to insolvency
• if high, focus on reserve adequacy and whether insurer has right valuation, mix&liquidity of assets in order if they can meet obligations

Question 15

Ratio10: gross agents’ balances in course of collection:PHS

Answer 15

• gross AB can not be converted to cash in event of liquidation
• unusual range: >40%

Question 16

Ratio11&12: 1&2 yr reserve development:PHS

Answer 16

R11=1yr development/prior PHS

R12=2yr development/second prior PHS

• reserves are net of S&S and gross of discounts
• ratios are same as development tests from 5-yr hist data exhibit
• if sign adverse devel, focus on which lines and AY caused it
• unusual range: >20%

Question 17

if R11 or R12 consistently showing adverse devel or R12 is consistently > R11

Answer 17

insurer may be intentionally understating

Question 18

Ratio13: estimated curr yr deficiency:PHS

Answer 18

Estimated deficiency=reserves required-curr reserves

Reserves required=EP*ratio of reserves: prem

reserves: prem=avg[(reserves from prior yr+1yr loss devel)/EP in prior yr,(reserves from 2nd prior+2yr loss devel)/EP in 2nd prior]
- all #s are net
- measures adequacy of curr reserves, theory = insurers that have understated are more likely to have deficient reserves in future
- unusual range: >25%

Question 19

distortions to R13 may arise when

Answer 19

there are changes in exposure due to mismatch in reserves:prem ratio

sign changes in prem vol will show deficiency greater and shift in product mix will understand if shift from prop to liab lines so good idea to calc ratio separately by LOB

-can be distorted to surplus aid from reins, reserve strengthening, changes in reserve philosophy, and commutation too

Question 20

Analyst Team System

Answer 20

• consists of financial examiners and analysts from 4 geo zones of NAIC
• objective=to identify companies requiring immediate attention so analyze IRIS, RBC and other monitoring tools
• reports only made available to insurance regulators
• no regulatory authority and limited resources

Question 21

Analyst Team System categorizes

Answer 21

A (immediate attention & financial analysis), B (does not require immed attention but may possibly have poor results), reviewed & no level

Question 22

if have > 4 unusual IRIS ratios

Answer 22

requiring a higher priority
level by NAIC analyst team in prioritization. State regulators might need to conduct
an onsite financial exam since the off-site financial monitoring is showing potential
concern

Question 23

reasons for unusual value of IRIS ratio 4

Answer 23

-Increase to Surplus Aid through a greater use of reinsurance as part of company
strategy for growth or mix of business related to exposure or geography

-Increase to Surplus Aid caused by increase in reinsurance commission rates
-A relatively new company may be increasing their writing potential by
utilizing larger amounts of reinsurance as a means of risk transfer
-Property insurers utilize reinsurance when business is in more catastrophe prone
areas

Question 24

to adjust ratios for surplus aid

Answer 24

can divide by (1-IRIS4)

For IRIS 1, 2, 10, 13

IRIS 7 takes more effort since 2 different surplus aids

Question 25

A high value for this IRIS2 might be interpreted less severely in the presence of several mitigating factors

Answer 25

- Steadily increasing profits - Adequate reinsurance - Affiliated companies in group have lower ratios

Question 26

response taken by the regulator in response to the IRIS tests

Answer 26

Failing ratios on the IRIS tests provides regulators an early warning of potential financial problems of an insurer. The regulators prioritize resources on companies with more failing tests. The tests indicate in which areas to further investigate.