Fall 2013, Question 6

rwhitingrwhiting
in NAIC.IRIS

Given the insurer fails IRIS Ratio 4, the examiners report gives the recalculated ratios for IRIS ratios 1, 2, 10 and 13. To recalculate them, they multiply the initial ratios by (1/.8). I do not know where they are getting this from. Could anyone help? I think it's using the fact that the surplus aid ratio is 20%, and that an indirect way to remove the surplus aid is to multiply by the reciprocal. Is that correct?

Comments

  • grahamgraham

    This is what I would call a math-contest type of problem. It requires algebraic manipulation versus actuarial reasoning. Let

    • A = surplus Aid
    • S = Surplus

    Then here's how to recalculate IRIS 1

    • We're given GWP/S = 750
    • We want to recalculate the left side by adjusting S by removing A.

    But what is the value of A?

    • We're given that IRIS 4 = A/S = 0.2
    • This implies A = 0.2S

    So the new value of IRIS 1 is:

    • GWP/(S-A)
    • = GWP/(S-0.2S)
    • = GWP/(0.8S)
    • = GWP/S x (1/0.8)
    • = 750 x (1/0.8)
    • =937.5

    The same trick works for the other ratios. (Just multiply them all by 1/0.8.)

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