NAIC.IRIS

IRIS stands for Insurance Regulatory Information System. It's a report card for insurance companies. If you get a bad GPA in school – you might flunk out. If an insurer gets bad IRIS ratios, they may go insolvent. Both outcomes suck. You only have to know section 2 from this reading (pages 5-26), which covers the P&C ratios. Basically, just memorize the formulas for the 13 IRIS ratios, and the acceptable range for each ratio. (The acceptable range is the insurer's version of the pass mark for an actuarial exam!)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• IRIS 1,2,3,4 (overall ratios)
• IRIS 11,12,13 (reserve ratios)
• evaluating financial health using IRIS (and possibly other financial statement information)
• rarely asked: IRIS 5,6 (profitability ratios)
• never asked: IRIS 7,8 (profitability ratios)
• never asked: IRIS 9,10 (liquidity ratios)

reference	part (a)	part (b)	part (c)	part (d)
E (2018.Spring #15)	IRIS 5 - using IEE 1	financial health
E (2018.Spring #16)	IRIS 4	IRIS 1,2	financial health
E (2017.Fall #15)	IRIS 2	IRIS 4	IRIS 11	IRIS 11 - insolvency impact
E (2017.Fall #16)	financial health	financial health
E (2017.Spring #12)	(non-IRIS) - net income	IRIS 1,2,3 - B/S strength	(non-IRIS) - reinsurance	(non-IRIS) - Schedule F
E (2017.Spring #17)	IRIS 1,2,3	IRIS 2 - improvement
E (2017.Spring #18)	IRIS 4	IRIS 4 - adjustment	IRIS 4 - importance
E (2016.Fall #15)	IRIS 13	IRIS 13 - distortion	financial health
E (2016.Spring #16)	IRIS 13	IRIS 11,12
E (2016.Spring #17)	IRIS 5	IRIS 5 - purpose	IRIS 6
E (2015.Spring #16)	IRIS 11	IRIS 12	IRIS 13	(d) interpret IRIS (e) solvency tools
E (2014.Fall #12)	(non-IRIS): surplus {see also Odo.8-9? or not?}	IRIS 2,4 - {see also Odo.8-9? or not?}	disclosures {see also Odo.8-9? or not?}
E (2014.Fall #17)	IRIS 1,2,3	IRIS 1 - concepts	IRIS 2 - concepts	IRIS 3 - concepts
E (2014.Spring #14)	(non-IRIS): B/S errors	(non-IRIS): A/L/surplus	IRIS 2
E (2014.Spring #19)	IRIS 4	IRIS 4 - analysis	IRIS 4 - adjustment
E (2013.Fall #6)	financial health
E (2012.Fall #20)	(non-IRIS): RBC	IRIS 3	IRIS 3 - versus RBC
E (2012.Fall #21)	IRIS 5	financial health

¹ This problem requires material from Odomirok.18-IEE on the Insurance Expense Exhibit, which you may not have covered yet. Still, it's a good idea to at least take a quick look at the solution in the examiner's report. Even if you haven't yet studied the Insurance Expense Exhibit, you could still take an educated guess on this problem based on general knowledge. Never underestimate the potential for getting partial credit!

In Plain English!

Intro

In the summary at the top of the page, I said the IRIS ratios are a report card for the insurer, and that bad IRIS ratios may indicate potential insolvency. Last night, Alice the Actuary sat down with a report that listed the IRIS ratios for all 37 insurance companies in her state.

• WTF is she going to do with all raw information?!!

Well, she wants to use that information to best allocate the resources of the state insurance department. The insurance companies with the crappiest IRIS ratios will get the most regulatory attention. It's like when you act up in class and the teacher starts keeping an eye on you. Not good!

Alice has organized the important information into the tables below. Eventually, you'll have to memorize all this. Ugh!!. But for now, just keep it handy for doing the practice template in the BattleCards. Once you get good at those easy problems, use mini BattleQuiz #2 to access old exam problems.

The NAIC reading is very well organized. If you have time, it's good bedtime reading to go over their descriptions of how to interpret the different ratios. (I don't think you'd miss much if you didn't look at it though. And given the time constraints in studying for this exam, I think you can get virtually all of what you need in this wiki article and by doing the old exam problems. I just like to point out when someone has done a good job writing an article, and the NAIC did a very good job here!)

The 13 IRIS ratios have been divided into 4 categories:

overall ratios: IRIS 1-4

profitability ratios: IRIS 5-8

liquidity ratios: IRIS 9-10

reserve ratios: IRIS 11-13

Some of the formulas have terms that are too complicated to put into the small space in the table below.

• These more complicated terms are indicated by a brown font in the tables.
• Click F in the tables below to link directly to the formula in the NAIC IRIS source reading.

Overall Ratios

IRIS ratios 1-4 are pretty easy to calculate. The only hard piece is calculating the surplus aid in IRIS 4.

OVERALL Ratios	Unusual Range	Formula	Interpretation	Details
IRIS 1 F	≥ 900%	GWP / surplus	high → more risk in relation to surplus	- surplus is a cushion for absorbing losses - IRIS 1 measures adequacy of cushion (IGNORING ceded premiums)
IRIS 2 F	≥ 300%	NWP / surplus	high → more risk in relation to surplus	- IRIS 2 measures adequacy of cushion (NET of ceded premiums) - do you see why the 'unusual range' ratio is lower than for IRIS 1?
IRIS 3 F	outside of (-33%, 33%)	chg(NWP) / (prior year NWP)	high (or low) → potential lack of stability in operations	- familiarity with insurer is totes helpful in interpreting IRIS 3 - high ratio could also mean less strict U/W or writing a new line
IRIS 4 F	≥ 15%	(surplus aid) / surplus	high → policyholder's surplus may be inadequate	- the formula for surplus aid is a mofo of a formula!

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Profitability Ratios

Potential Confusion: For ratios 1-4, you have to know the range of values that are unusual (bad values), but for ratios 5-13, it's the opposite - the given ranges represent the usual (good) values.

IRIS ratios 5-8 are harder to calculate. The parts of the formulas that have more pieces are indicated in blue. You have to click the link in the first column of the table to bring up the source text with the full formula. Note also that I've used the following abbreviations in the formulas:

IRIS 5:

IIR: Investment Income Ratio

IRIS 6:

NII: Net Investment Income

Note: Some IRIS ratios have specific names, like IRIS 5 (2-yr Overall Operating Ratio), or IRIS 6 (Investment Yield). Others don't, like IRIS 7 & 8.

PROFITABILITY Ratios	Usual Range	Formula	Interpretation	Details
IRIS 5 F	< 100%	2-yr Operating Ratio    = 2-yr Loss Ratio    + 2-yr Expense Ratio    – 2-yr IIR	low → better operating profit	- IRIS 11 (1-yr reserve development) & IRIS 13 (reserve deficiency) are closely related to IRIS 5 - must recalc IRIS 5 if IRIS 11 outside usual range (first eliminate prior year development)
IRIS 6 F	(3%, 6.5%)	Investment Yield    = 2 x (NII earned)          / denominator	low → multiple potential causes high → not necessarily good	cause #1 for low: speculative instruments providing capital gain but no interim income cause #1 for high: high-risk instruments (may leverage surplus unduly)
IRIS 7 F	(-10%, 50%)	chg(surplus) / surplus	low → dangerous surplus decrease high → possible insolvency	cause #1 for low: decrease in net income comment on high: insurers often have increase in surplus before insolvency
IRIS 8 F	(-10%, 25%)	chg(adjusted surplus) / surplus	low (high) → deterioration (improvement) in financial condition due to operations	similar comments to IRIS 7

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Liquidity Ratios

LIQUIDITY Ratios	Usual Range	Formula	Interpretation	Details
IRIS 9 F	< 100%	(adjusted liabilities) / (liquid assets)	high → trouble meeting short-term obligations	- insolvent insurers often have high ratios prior to insolvency - consider trend over prior years
IRIS 10 F	< 40%	(gross agents’ balances in collection) / surplus	high → agents may be slow in paying	- balances > 90 days overdue may need to be removed from admitted assets

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Reserve Ratios

RESERVE Ratios	Usual Range	Formula	Interpretation	Details
IRIS 11 F	< 20%	(1-yr loss reserve development) / (surplus: prior year)	positive → reserve deficiency negative → reserve redundancy	isolate LOB/AY using Sched P, Part 2
IRIS 12 F	< 20%	(2-yr loss reserve development) / (surplus: 2nd prior year)	positive → reserve deficiency negative → reserve redundancy	isolate LOB/AY using Sched P, Part 2
IRIS 13 F	< 25%	[estimated reserve deficiency (redundancy)] / surplus	positive → reserve deficiency negative → reserve redundancy	- affected by changes in mix, premium volume - good test for correction of reserve deficiencies

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More Old Exam Problems

Exam Tip: When you get to an IRIS question, take a minute and write out the formulas you'll need along with their acceptable ranges. Then start putting the numbers into the formulas and doing the calculations.

mini BattleQuiz 5 (Exam problems from 2018 not covered in previous mini BattleQuizzes.)

mini BattleQuiz 6 (Exam problems from 2017 not covered in previous mini BattleQuizzes.)

mini BattleQuiz 7 (Exam problems from 2016 & 2015 not covered in previous mini BattleQuizzes.)

mini BattleQuiz 8 (Exam problems from 2014 not covered in previous mini BattleQuizzes.)

BattleActs Tip: All old exam problems, including those from 2013 & 2012, can be accessed through Level 3: Custom Battles

BattleCodes

Memorize:

Conceptual:

Calculational: