IRIS 13

How change in mix of business and change in premium volume affect IRIS 13?

For example, (1) if there is an increase in EP (2) If there is a shift from shower tail to longer tail, how these two lead to distorted IRIS 13?

Thank you

Comments

  • First, try clicking on the green "F" under IRIS 13 in the Reserve Ratios table in the NAIC.IRIS wiki article. This will bring up 2 pages from the source text that explain how mix change and premium volume affect IRIS 13.

    Or you can look at the formula for IRIS 13, which is provided in the practice template for IRIS 11,12,13. (This is in Quiz 4 of the NAIC.IRIS wiki article.)

    • If premium (NEP) increases
    • -> required amount increases
    • -> deficiency increases
    • -> IRIS 13 ratio increases

    This could be considered a distortion because the increase in IRIS 13 is due to an increase in current EP but this isn't necessarily related to adequacy of reserves from past years. (A big increase or decrease in premium volume often causes distortions in financial results because of timing mismatches like this.) In this case, IRIS 13 is likely overstating the actual reserve deficiency.

    It isn't as straightforward when there's a shift from shorter to longer tailed lines, but the general idea is that longer-tailed lines have higher reserves. (Their reserves have to stay on the books longer.)

    • If you look at the formula for IRIS 13 in the practice template, you'll see that the required amount will increase so the deficiency would tend to increase. But note also that the reserves are subtracted from the required amount to calculate deficiency so that would tend to decrease the deficiency. So just from looking at the formulas, it isn't clear how the final IRIS 13 ratio would be affected. But the source text says the shift from short-tailed to long-tailed would understate reserve deficiencies. If you're asked this on the exam, that's probably what you should say.

    It might also be important to know how to address distortions caused by shifts from short-tailed to long-tailed lines. The source text says:

    • calculate IRIS 13 separately for major product groups (group short-tailed lines together separately from long-tailed lines for the purpose of calculating IRIS 13)
  • Okay! Thank you.

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