IRIS Ratio 7 Question
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
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:
surplus should also be adjusted to remove surplus aid.
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:
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
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.
Okay, thanks! Makes sense.
Sure, good luck.