IRIS Ratio 7 Question

Turley36Turley36
in NAIC.IRIS

I was curious what adjustment you would make to the IRIS 7 ratio if the company's IRIS 4 ratio is outside of the usual range. Would you need to know the both the prior & current year IRIS 4 ratios, and apply the necessary adjustment to the prior and current year surplus? It feels inappropriate to remove the current surplus aid from the denominator, and if you are only to apply the removal of the surplus aid from the current year policy holder surplus, then this no longer feels like an apples to apples surplus comparison. Plus removal of the surplus aid from the current surplus could actually bring the IRIS 7 ratio into the usual range if it's above the upper bound.

Also, if IRIS 7 is impacted when IRIS 4 is outside of the usual range I am curious why IRIS 8 isn't. Since that is just an adjustment to IRIS 7.

Comments

  • grahamgraham

    I copied the section from the IRIS document below and put further comments down below:

    For the reasons previously stated, all insurers with ratios greater than 15 percent should be given careful scrutiny regardless of their scores on other ratios. The following ratio results should be recalculated with policyholders’ surplus adjusted to remove surplus aid:

    1. Gross and Net Premiums Written to Policyholders’ Surplus (Ratios 1 and 2).
    2. Gross Change in Policyholders’ Surplus (Ratio 7). The previous year’s policyholders’
      surplus should also be adjusted to remove surplus aid.
    3. Gross Agents’ Balances (in collection) to Policyholders’ Surplus (Ratio 10).
    4. Estimated Current Reserve Deficiency to Policyholders’ Surplus (Ratio 13).

    These adjustments can be made without recalculating the numerator. Divide the result for each ratio by the difference between one and the surplus aid ratio result expressed as a decimal.

    Further comments:

    • Recalculating IRIS 7 based on an out-of-range IRIS 4 was done in an old exam problem: https://battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(19).pdf
    • It seems you don't need the prior year's IRIS 4 value, just the prior year's surplus and surplus aid, although if you had that, you basically have the prior year's IRIS 4 as well.
    • So to recalculate IRIS 7, just subtract surplus aid from surplus for both the current and prior year and substitute those values into the current year IRIS 7 formula. (Or use the trick they give above.)
    • As to why you don't have to recalculate IRIS 8, I scanned the formulas for the ratios you do have to recalculate: 1,2,7,10,13 and those all explicitly involve current year surplus. IRIS 8 has something called adjusted surplus in the numerator (which is surplus with a few items taken out) and I'm guessing it's considered far enough removed from regular surplus that it isn't relevant in the analysis. So even though IRIS 8 may change, regulators may have decided that a new IRIS 8 value wouldn't provide any relevant new information.
  • arch1892arch1892

    Isn't IRIS 7 recalculated because it includes current year PHS in the numerator which has to be adjusted to remove surplus aid?
    IRIS 11 & 12 are not recalculated which use prior year PHS in the denominator

  • Staff - ACStaff - AC

    Both the current-year and the prior-year surplus figures that go into IRIS 7 need to be netted of surplus aid.

    IRIS 11 & 12 are not recalculated, because they are not directly related to surplus adequacy, which is what IRIS 4 measures.

  • arch1892arch1892

    Okay, thanks! Makes sense.

  • Staff - ACStaff - AC

    Sure, good luck.

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