RBC vs. IRIS
How would you describe the difference in purpose between the RBC ratio and the set of IRIS ratios? They both seem to be monitoring solvency. However, for some reason there seems to be much more aggressive action involved in the RBC ratio if it falls below the different thresholds.
Comments
RBC is the regulatory remedy to ensure that companies hold sufficient capital. Its main purpose is to ensure insurer solvency. It puts all risk considerations of an insurer into a formula that gives the required capital, to establish standard practice across the industry. The formulaic approach inevitably simplifies the answers to some risk questions, whereas capital modeling can address them in a more sophisticated way.
The full gamut of IRIS ratios also address some of the risks that the insurer faces. But unlike the RBC, they address them one at a time. They are ratios that can be easily derived from annual statement content, and they are coupled with subjective thresholds, the crossing of which indicates that you need to pay attention to the risk being addressed. And unlike the RBC, they don't prescribe the amount of capital needed to fend off the particular risk.