IRIS Flashcards
IRIS tests are used
by regulators to identify insurers that are in need of regulatory attention, ratio calc is compared to normal range
individual ratio should not be reviewed in isolation
result of other ratios in addition to other pertinent info should be considered
Ratio1: GWP:PHS
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)
Ratio2: NWP:PHS
- 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
Ratio3: Change in Net Writings
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
not greater chance of insolvency if increase in NWP is accompanied by
low ratio2, adequate reserving, profitable operations, and stable product mix
reduction in NWP accompanied by relatively stable GWP may indicate
that insurer is trying to increase cash flow from ceding commissions -> look at surplus aid to determine
Ratio4: Surplus Aid:PHS
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)
Ratio5: 2 yr overall operating ratio
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
Ratio6: investment yield
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
Ratio7: gross change in PHS
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
factors affecting changes in surplus
=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
Ratio8: net change in adjusted PHS
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
Ratio9: adjusted liabilities:liquid assets
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
Ratio10: gross agents’ balances in course of collection:PHS
- gross AB can not be converted to cash in event of liquidation
- unusual range: >40%
