Iris Tests

Question 1

Iris Tests

Answer 1

Used by regulators to identify insurers that are in need of regulatory attention

Question 2

Overall Ratios
Tests 1-4

Question 3

Profitability Ratios
Tests 5-8

Question 4

Liquidity Ratios
Test 9 and 10

Question 5

Reserve Ratios Test 11 - 13

Question 6

IRIS TEST 1

Answer 6

GWP:PHS

Unusual Range > 900

Measures adequacy of surplus on a D&A (GROSS) business (how much premium is surplus supporting)

As premium increases, surplus increase

Use ending surplus.
Dont subtract out ceded WP from the gross.

Question 7

IRIS TEST 2

Answer 7

NWP: PHS
Unusual Range > 300

measures adequacy of surplus on a net basis

Question 8

IRIS TEST 3

Answer 8

CHANGE IN NWP = (Curr NWP - Prior NWP) / (Prior NWP)

looking at stability of NWP which could give a meaure of stability of insurer’s operations

Unusual Range > 33

OR

Unusual Range < -33

Question 9

IRIS TEST 4

Answer 9

SURPLUS AID TO PHS

Surplus Aid : PHS

Where,
Surplus Aid = ceding commission ratio x ceded UEPR (non-addiliated)

Ceding Commis. Ratio = Reins Ceded Comissions / Reins Prem ceded (affil & non-affil)
*above formula is similar to average ceding commis ratio because they may vary by Reinsurer

Unusual Range < 15

Question 10

IRIS TEST 5

Answer 10

2 YR OVERALL OPERATING RATIO

Measures profitability of insurer and can help identify what is causing poor performance

2 yr overall operating ratio = 2 year LR + 2 year Expense Ratio - 2 year II Ratio

where,
2 year LR = (Net L+LAE + PHDividend over 2 years) / NEP Over 2 years

2 year Expense R = (2 yr Other UW Income - 2 Yr Other Income) / NWP Over 2 years

2 year I.I Ratio = (Net investment income over 2 years) / NEP Over 2 years

Unusual Range < 100

Using 2 years smooths unusual fluctuations

Question 11

IRIS TEST 6

Answer 11

INVESTMENT YEILD =
2 X (Net II Earned / Cash&Invested assets b/n Curr and Prior yr)

Indicates general quality of investments portfolio
-can possibly identify inefficient or expensive investment strategy

where,
Cash&Invested assets b/n Curr and Prior yr) =
Curr and Prior Year Cash
+ Current and Prior II Due and Accrued
- Current and Piror Year Borrowed Money
- Net II Earned
(note, first three are from balance sheet and 4th item is from income statement)

Unusual Range > 5.5

OR

Unusual Range < 2

Question 12

IRIS TEST 7

Answer 12

GROSS CHANGE IN PHS = Change in PHS / Prior PHS

Ultimate measure of change in financial condition. Matters to investors the most. Measures the successfulness of the year.

Unusual Range > 50

OR

Unusual Range < -10

Question 13

IRIS TEST 8

Answer 13

CHANGE IN ADJUSTED PHS - Change in Adjusted PHS / Prior PHS

This ratio measures the change in financial condition based on operational results.

Adjusts surplus for changes contributed to the company by owners or pulled out by owners

where,
Change in Adj PHS =
PHS of curr year
- changes in surplus notes
- capital pain in
- surplus paid in
- PHS at prior YE

Unusual Range > 25

OR

Unusual Range < -10

Question 14

IRIS TEST 9

Answer 14

ADJUSTED LIABILITIES TO LIQUID ASSETS

Liabilities to liquid assets = adjusted liabilities / liquid assets

measures the insurer’s ability to meet the financial demands.

provides rough indication of the possible implications for policyholders if
liquidation is necessary

where,
adjusted liab = liabilities - liabilities equal to deferred agents balance
liquid assets = liquid assets - investments in parents/ subsidiaries / affiliates

Unusual Range > 100

Liquid Assets consist of: Bonds, Stocks, Cash, Cash-Equivalents, Short Term Investments,
Receivables for Securities, and Investment Income Due & Accrued

Question 15

IRIS TEST 10

Answer 15

GROSS AGENTS BALANCE TO PHS

Gross AB in course of collection / PHS

Gross AB usually cannot be converted to cash in event of liquidation

Unusual Range > 40

Question 16

IRIS TEST 11

Answer 16

1 YEAR RESERVE DEVELOPMENT TO PHS = 1 year reserve development / prior PHS

Pulled from Sched P (will be net of sal/sub and gross of DC)

Unusual Range > 20

Question 17

IRIS TEST 12

Answer 17

2 YEAR RESERVE DEVELOPMENT TO PHS
= 2 year reserve development / prior PHS from 2 years ago

Pulled from Sched P (will be net of sal/sub and gross of DC)

Unusual Range > 20

Question 18

IRIS TEST 13

Answer 18

ESTIMATED CURRENT RESERVE DEFICIENCY / PHS

Measures adequacy of current reserves.
The ratio is subject to distortion

Where,
Estimated Deficiency = Reserves Required - Curr reserves

Reserves Req = EP x (Ratio of Reserves to Premium)

Ratio of Reserves to Premium = average (prior reserves: premium, 2nd Prior Year Reserves: Premium)

Prior Reserves: Premium= (Prior Reserves:Prem + 1 year development ) / Prior EP

2nd Prior Reserves: Prem = Second year Reserves:Prem + 2 year development ) / Second Prior EP

Unusual Range > 25