What are the 4 categories of IRIS ratios?
- Overall - IRIS 1-4
- Profitability Ratios - IRIS 5-8
- Liquidity RAtios - IRIS 9-10
- Reserve Ratios - IRIS 11-13
What is IRIS 1 and how is it calculated?
- Gross Written Premium to Policyholder Surplus Ratio
- IRIS 1 = GWP / PHS
- Unsual Range: >=900%
- Measures ability to absorb losses, too high of ratio means there may not be enough surplus to support losses.
What is IRIS 2 and how is it calculated?
- Net Written Premium to Policyholder Surplus
- IRIS 2 = NWP / PHS
- Unusual Range >= 300%
- Measures ability of the surplus to pay claims after reinsurance.
What is IRIS 3, it’s purpose and how is it calculated?
- Percent Change in NWP
- It measures the change in NWP to the prior year NWP [chg(NWP) / (PY NWP)]
- The unusual range is outside of range -33% to + 33%.
- Lots of potential reasons by it could be unusual, so need to familiar with the company.
Instability of operations, discontinue LOB, purchase more reins. etc.
What is IRIS 4, it’s purpose, and how is it calculated?
- Attempting to measure adequacy of surplus and whether a company is excessiviely relying on reinsurance to boost surplus.
- IRIS 4 = Cediing Commission Ratio x Unearned Premium Non Affliates / PH Surplus
- Where Ceding Commission = Reins Ced Comm / CWP
- Where UEP = US Unaffiliated UEP + Mandatory Pools + Non-US Unaffiliated
- Unusual Range >15%
What IRIS Ratios need to be adjusted if IRIS 4 is in the unusual range?
If IRIS 4 is in unusual range, must review IRIS ratios 1, 2, 7, 10, 13 with surplus aid removed.
Adjust Surplus by 1 / (1-IRIS 4)
What is IRIS 5, it’s purpose and how is it calculated?
- IRIS 5 - 2 Year Operating Ratio
- Measures profitability since this is the main driver of solvency.
- = Loss Ratio + Expense Ratio - Investment Ratio
- Unusual Range >100
- Loss Ratio Includes Dividends
- Expense Ratio is netted out for Other Income
Balance sheet could be strong, but poor profitability could signal problems.
What are some reasons IRIS 5 may be unusual what other IRIS ratios should be looked at?
- Large losses or poor loss development
- Reserve strengthening
- Cat Losses
- High Commision and Brokerage Fees
- High Salaries and operating expenses
IRIS 11 and 13, which can inform about one year reserve development and current deficiency. If IRIS 11 is unusual then can recalc IRIS 5 after eliminating prior year development so the current operating position is accurate
What is IRIS 6, it’s purpose and how is it calculated?
- IRIS Ratio 6 - Investment Yield
- MAX [200 * (Net Investment Income Earned / (Cash & Invested Assets, Current & Prior Years), 0]
- Unusual Range is >5.5% and <2% or usual range is 2% to 5.5%
What are the reasons / implications of a Low Investment Yield (IRIS 6)?
- Top Reason: Speculative instruments providing a capital gain, but no interim income
- Large Investments in affiliated entities under control of the company. How liquid are they?
- Considerable investments in tax exempt bonds
What is IRIS 7, it’s purpose and how is it calculated?
- IRIS Ratio 7: Gross Change Policyholders’ Surplus
- Purpose: Measure changes in insurer financial condition over 1 year.
- Calculation: (PHSCY - PHSPY) / PHSPY
- Usual Range: >-10% and <50%
What may yield a high IRIS 7 ratio?
- Significant growth
- Merger or acquisition
- Shifting capital between companies within a group
What may yield a low IRIS 7 ratio?
Top Reason: Decrease in Net Income. Check IRIS 5 for operating performance
Other reasons:
* Unrealized capital gains or losses. Check Exhibit of Capital Gains
* Change in surplus notes, capital paid in or surplus paid in. Consider IRIS 8, where these adjustments are made
* Dividends
* Change in Non-Admitted Assets
* Change in Net Deferred Income Tax
Note many of these items are not included in Net Income
What is IRIS 8, it’s purpose and how is it calculated?
- IRIS 8:Change in Adjusted Policyholder Surplus
- Purpose: Measure changes in company’s financial condition base only on operating results
- Calculation: Same as IRIS 7, but removing change in surplus notes, change in capital paid in, and change in surplus paid in
- Usual Range: >-10% and <25%
What events may lead to an unusual IRIS 8 ratio?
- Change in Net Income
- Net Unrealized Capital Gains/Losses
- Change in Non-Admitted Assets
- Change in reinsurance provision
- Cumulative change of accounting principles
- Dividends or changes to Treasury Stock
Note these are all due to operations and not capital paid in
What is IRIS 9, it’s purpose and how is it calculated?
IRIS Ratio 9 - Adjusted Liabilities to Liquid Assets
Calculation: 100 [Adjusted Liabilities / Liquid Assets]
Where:
Adjusted Liabilities = Total Liabilities - Deferred Agent Balances
Liquid Assets = Bonds + Stocks + Cash, Cash Equiv, Short Term Investments + Receivable for Securities + Interest due and accrued - Investments in parents, subsidiaries and affiliates
Purpose: Measure companies ability to meet short term obligations
Unusual Range > 100%
What does a high IRIS 9 ratio mean?
- Look at trend of IRIS 9 as many insolvencies see an increase during final years.
- Adequacy of Reserves: If reserves are inadequate this will increase strain on the company.
- Look at the mix and liquidity of assets to meet obligations
What is IRIS 10, it’s purpose and how is it calculated?
- IRIS 10 - Gross Agent Balances in Collection to Policyholder Surplus
- Purpose: To measure agent balances against surplus
- Calculation: 100 [Gross Agent Balances in Course of Collection / PolicyHolder Surplus]
- Unusual Range: >40%
- If unusual note proportion that is greater than 90% overdue.
Reinsurers can use agent balances to offset losses to insurer
What is IRIS 11, it’s purpose and how is it calculated?
- IRIS Ratio 11 - One Year Reserve Development to Policyholder Surplus
- Purpose: Measure reserve deficency/adequacy on a one year basis
- Calculation: 100 [One-Year Loss Rsv Development / Policyholder Surplus, Prior Year]
- Usual Range: <20%
Look at in conjuction with IRIS 12
What is IRIS 12, it’s purpose and how is it calculated?
- IRIS Ratio 12 - Two Year Reserve Development to Policyholder Surplus
- Purpose: Measure reserve deficency/adequacy on a two year basis
- Calculation: 100 [Two-Year Loss Rsv Development / Policyholder Surplus, Prior Year]
- Usual Range: <20%
Look at in conjunction with IRIS 11
What to do with unusual IRIS 11 and IRIS 12 ratios?
- Look at Schedule P, Part 2 to determine which LOB and AY’s are causing problems.
- Looks to see if IRIS 11 is continually showing adverse development as this indicates company may be intentionally understating reserves
- Look to see if IRIS 12 is continually worse than 11 as this indicates underreserving.
- Where there are any commuations or discounting that could impact the ratios?
- Was there reserve strengthening which could lead to high ratio?
What is IRIS 13, it’s purpose and how is it calculated?
- IRIS Ratio 13: Estimated Current Reserve Deficiency to Policyholder Surplus
- Purpose: Test Adequacy of current reserves
- Calc: 100 [ Est. L&LAE Reserve Deficiency or Redundancy / Policyholder Surplus, Curr Yr]
- Where: Est. L&LAE Reserve Deficiency or Redundancy = (Current Earned Premium x Preliminary Ratio) - Current Reserve
- Usual Range < 25%
Preliminary Ratio = Avg. Ratio of Reserves to Premiums over the past 2 years
In what situations can IRIS 13 be skewed?
- Significant changes in premium volume
Significant changes may indicate deficiency is greater than actual - Changes in product mix
Shift from Property to Liability may cause ratio to reflect understated reserve
If shifts, calculate at major product group level
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Odomirok - RBC36
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NAIC IRIS Ratios23
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Cook - High Risk Personal Auto and Residual Market23
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Odomirok - Schedule F34
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Germani - Government Insurance25
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Klann - Reinsurance Commutation15
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Horn - Private Flood Insurance and NFIP17
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Odomirok - Income Statement25
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Porter - Chapter 2 Development of Insurance Regulation15
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Vaughn - Crisis10
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Odomirok - Insurance Expense Exhibit (IEE)19
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Odomirok - Schedule P20
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Odomirok - GAAP25
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Freihaut - Reinsurance Risk Transfer18
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NAIC SSAP 626
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Odomirok - Taxation13
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AAA Uncollectible Reinsurance12
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Porter - Insolvency16
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COPFLR30
