Pooling Arrangement
The NAIC IRIS source mentions that a pooling arrangement may skew ratio #1 and affect its interpretation. Could you speak more on specifically how it would do this?
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The NAIC IRIS source mentions that a pooling arrangement may skew ratio #1 and affect its interpretation. Could you speak more on specifically how it would do this?
Comments
Sure, a pooling arrangement can artificially inflate the gross premiums written, thereby distorting IRIS Ratio 1 and potentially misrepresenting the insurer’s financial stability and risk exposure.
Also, the policyholders’ surplus used in the denominator might not reflect the risk adequately if the surplus is not proportionately pooled. In other words, if the surplus reported is for each insurer individually but the GWP is the pooled figure then the IRIS ration could be skewed.
And in general, pooling could incorporate complicated reinsurance arrangements and potentially hide the true risk - either exaggerate it for some companies in the pool or make it seem lower than it really is for others.
Basically, any situation where the input values are not straightforward can potentially cause issues with interpretation.