IRIS Ratios

Question 1

IRIS 1

Answer 1

Range: <=900%
Formula: GWP / Surplus
High -> more risk in relation to surplus
Details:
- surplus is a cushion for absorbing losses
- measures ADEQUACY of cushion (IGNORING ceded premium)

Question 2

IRIS 2

Answer 2

Range: <= 300%
Formula: NWP / Surplus
High -> more risk in relation to surplus
Details:
- measures ADEQUACY of cushion (NET of ceded premiums)

Question 3

IRIS 3

Answer 3

Range: [-33%, 33%]
Formula: chg(NWP) / (prior year NWP)
high (or low) -> potential lack of stability in operations
Details:
- familiarity with insurer is helpful in interpreting IRIS 3
- high ratio could also mean less strict U/W or writing a new line

Question 4

IRIS 4

Answer 4

Range: < 15%
Formula: (surplus aid) / surplus
High -> policyholder’s surplus may be inadequate
Details:
- must recalculate IRIS 1,2,7,10,13 (with surplus aid removed from surplus) if IRIS 4 is UNUSUAL

Question 5

Surplus Aid (formula for IRIS 4)

Answer 5

Surplus Aid = (Ceding Commissions Ratio) * (Sum of Unearned Premiums-Non-Affiliates)
Ceding Commissions Ratio = (Reinsurance Ceded Commissions) / (Reinsurance Premiums Ceded)
Sum of UPNA = (UP for Total A,U,C,RJ Other US Unaffiliated Insurers) + (UP for Total A,U,C,RJ Mandarory & Voluntary Pools) + (UP for Total A,U,C,RJ Other Non-US Insurers)
UP: Unearned Premium
A,U,C,RJ: Authorized, Unauthorized, Certified, & Reciprocal Jurisdiction

Question 6

IRIS 5

Answer 6

Range: < 100%
Formula: 2-YR OPERATING RATIO = (2-yr Loss Ratio) + (2-yr Exp Ratio) - (2-yr Investment Income Ratio (IIR))
Low -> better operating profit
Details:
- Loss Ratio term includes dividends
- IRIS 11 (1-yr reserve development) and IRIS 13 (reserve deficiency) are closely related to IRIS 5

Question 7

IRIS 6

Answer 7

Range: (2%, 5.5%)
Formula: INVESTMENT YIELD = 2 * (Net Investment Income (NII) Earned) / denominator
denominator: Avg. Cash and Invested Assets, Current and Prior Year = (2-yr Total Cash and Invested Assets) + (2-yr Investment Income Due & Accrued) + (2-yr Borrowed Money) - (Net Investment Income (NII) Earned)

Low -> multiple potential causes; High -> not necessarily good either
Details:
- #1 cause for Low: speculative instruments providing CAPITAL GAIN but NO INTERIM INCOME
- #1 cause for High: high-risk instruments (may leverage surplus unduly)

Question 8

IRIS 7

Answer 8

Range: (-10%, 50%)
Formula: chg(surplus) / (prior yr surplus)
Low -> dangerous surplus decrease
High -> possible insolvency
Details:
- #1 cause for Low: decrease in net income
- comment on high: insurers often have increase in surplus before insolvency

Question 9

IRIS 8

Answer 9

Range: (-10%, 25%)
Formula: (adjusted surplus) / (prior yr surplus)
Low (High) -> deterioration (improvement) in financial condition due to operations
Details:
- similar to IRIS 7

Question 10

Adjusted Surplus (formula for IRIS 8)

Answer 10

(Policyholder’s Surplus current yr) - (Change in Surplus Notes) - (Capital Paid-in or Transferred) - (Surplus Paid-in or Transferred) - (Policyholder’s Surplus prior yr)

Question 11

IRIS 9

Answer 11

Range: < 100%
Formula: (adjusted liabilities) / (liquid assets)
High -> trouble meeting short-term obligations
Details:
- insolvent insurers often have high ratios prior to insolvency
- consider TREND over prior years

Question 12

Adjusted Liabilities and Liquid Assets (formulas for IRIS 9)

Answer 12

Adjusted Liabilities = (Total Liabilities) - (Liabilities 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)

Question 13

IRIS 10

Answer 13

Range: < 40%
Formula: (gross agents’ balances in collection) / surplus
High -> agents may be slow in paying
Details:
- balances > 90 days overdue may need to be removed from admitted assets

Question 14

IRIS 11

Answer 14

Range: < 20%
Formula: (1-yr loss reserve development) / (surplus prior yr)
Positive -> reserve deficiency
Negative -> reserve redundancy
Details
- isolate LOB/AY using Schedule P, Part 2

Question 15

IRIS 12

Answer 15

Range: < 20%
Formula: (2-yr loss reserve development) / (surplus 2nd prior yr)
Positive -> reserve deficiency
Negative -> reserve redundancy
Details
- isolate LOB/AY using Schedule P, Part 2

Question 16

IRIS 13

Answer 16

Range: < 25%
Formula: (estimated reserve deficiency (redundancy)) / surplus
Positive: reserve deficiency
Negative: reserve redundancy
Details:
- affected by changes in mix, premium volume
- good test for correction of reserve deficiencies

Question 17

Estimated Reserve Deficiency or Redundancy (formula for IRIS 13)

Answer 17

Est. Reserve Deficiency (Redundancy) = (Est. Loss & LAE Reserves Required) - (Loss & LAE Reserves current yr)
Est. Loss & LAE Reserves Required = (Premiums Earned current yr) * (Avg. Ratio of Reserved to Premiums (PRELIMINARY RATIO))

Preliminary Ratio = AVG[(Developed Loss & LAE to Premium Ratio, prior yr),(Developed Loss & LAE to Premium Ratio, 2nd prior yr)]

For prior and 2nd prior yr:
Dev to Prem Ratio = (Developed Loss & LAE Reserves) / (Premiums Earned)
Developed Reserves = (Loss & LAE Reserves) + (1-yr (or 2-yr) Loss Reserve Development)