NAIC.IRIS

Reading: “NAIC Insurance Regulatory Information System (IRIS) Ratios Manual,” 2021, Section II, Property/Casualty Ratios, pp. 5-26.

Author: NAIC (National Association of Insurance Commissioners)

Forum

Study Tips

The CAS syllabus citation for this article is confusing because it's always listed as a NEW. Most years, the only thing that changes is the publication date; the content of the article generally does not. Recent changes are as follows:

Update for 2019.Fall exam: The acceptable range for IRIS ratio 6 has changed. The range was lowered by 1 point to 2.0% → 5.5%. Very important!!
Update for 2020.Fall exam: The formula for IRIS 4 has been modified in a very minor way and is almost certainly immaterial for calculating IRIS 4 on the exam. The calculation of unearned premiums for surplus aid now includes "Reciprocal Jurisdictions". This change is highlighted in the IRIS 4 formula.
Update for 2022.Fall exam: Branded Risk Classifications. Note that this comes from page 3 of the source text whereas the syllabus specifies pages 5-26 as the relevant material you need to study. The ambiguity is that the content in pages 5-26 reference this page 3 material so it isn't completely clear whether or not you need to know it. It's pretty easy however, so it might be worth the extra 15 minutes to study it, just in case.

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 13 P&C IRIS ratios.

The practice templates in the quizzes provide randomly generated problems for calculating IRIS ratios. Practice them relentlessly until you get them consistently correct. You have to memorize the formulas for the 13 IRIS ratios, and the acceptable range for each ratio. (The acceptable range is the insurance version of the pass mark for an actuarial exam.)

Everything you need to know about IRIS ratios is in the NAIC reading. The IRIS chapter in Odomirok had only 1 thing that wasn't in the NAIC reading but that topic has been deleted. (The topic was the Analyst Team of financial examiners from the 4 geographic regions of the U.S., just in case you wanted to know!)

Estimated Study Time: several days (not including subsequent review time)

Source Readings: BattleActs includes all material from past exams in at least 1 of the elements of the system: wiki articles, BattleCards, BattleTables. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be much more efficient. For a little more on this click on Using the Source Material.

BattleTable

We have compiled previous exam questions in a table. You can use this to easily see which topics are tested most frequently.

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)
rarely asked: IRIS 9,10 (liquidity ratios)
very rarely asked: IRIS 7,8 (profitability ratios)
Branded Risk Classifications ← This topic was inserted into the IRIS material after the CAS stopped publishing exams so there are no exam questions that cover this.

Questions held out from Fall 2019 exam: #17, 18. (Skip these now to have a fresh exam to practice on later. For links to these questions, see Exam Summaries.)

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #10)	Odomirok.8-9-IS	IRIS 9	liquidity information: - identify schedules/exhibits
E (2019.Spring #14)	IRIS 10 - calc & financial health	IRIS 11 - calc & financial health	IRIS 12 - calc & financial health	IRIS 13 - calc & financial health
E (2018.Fall #16)	IRIS 7 ² ← never asked before
E (2018.Fall #17)	IRIS 13	reserve adequacy: - concerns
E (2018.Fall #18)	Odomirok.19-RBC	Odomirok.19-RBC	IRIS 1,2: - financial health
E (2018.Spring #15)	IRIS 5 - using IEE ^{1, 1a}	financial health
E (2018.Spring #16)	IRIS 4 ^4a	IRIS 1,2 ^4b	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 - see Odomirok.8-9-IS	IRIS 1,2,3 - B/S strength	(non-IRIS): reinsurance - see Odomirok.10-Notes	(non-IRIS): reinsurance - see Odomirok.14-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 ³
E (2015.Spring #16)	IRIS 11	IRIS 12	IRIS 13	(d) interpret IRIS (e) solvency tools
E (2014.Fall #12)	(non-IRIS): surplus - see Odomirok.8-9-IS	IRIS 2,4 ⁵	(non-IRIS): disclosures - see Odomirok.10-Notes
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 - see Odomirok.6-7-BS	(non-IRIS): A/L/surplus - see Odomirok.6-7-BS	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 - see Odomirok.19-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!

^1a The given information in this problem should have provided realized capital gains so that it could be subtracted from (investment income gain attributable to insurance transactions) + (Investment income attributable to capital and surplus) to get investment income earned. Since it was not provided however, you can't subtract it. (shout-out to jaarndt)

² There is a long forum thread about this problem. You will need to cover Odomirok Chapter 9 before you can solve this IRIS ratio problem. When you do, you can come back to study the following pdf. This shows how to make the calculation fit into the format of 2017.Fall #10. That problem is not an IRIS ratio problem but it involves very similar income statement calculations. 2018.Fall #16 (change in surplus calculation) Also, note that in sample answer 1 from the examiner's report, the line Div to SH is shown as 105, but this value is actually subtracted to get the total of -108. ← shout-out to tubaguy!

³ The examiner's report answer is outdated because in the 2018 edition of the IRIS publication, the acceptable range for IRIS 6 was lowered to 2.0% → 5.5%. The calculation is unchanged.

^4a The given information for calculating IRIS 4 is ambiguous is 2 ways: [1] You aren't told whether the UEPR is for affiliates or non-affiliates. This examiner's report provides 5 different ways of doing the problem that's consistent with the given information. [2] You also aren't told that the UEPR is ceded UEPR but you had to make that assumption to do the problem. (Surplus aid uses ceded UEPR.)

^4b The sample answers for part (b) are reversed. If IRIS 4 is usual then you do not remove surplus aid calculating IRIS 1 & 2. And conversely if IRIS 4 is unusual then you do remove surplus aid for IRIS 1 & 2. (shout-out to wschwart9!)

⁵ See 2014.Fall #12b in the forum for a solution to part (b) of this problem in calculating IRIS 4.

Full BattleQuiz You must be logged in or this will not work.

Forum

In Plain English!

Intro

There is a short comment in the source text explaining how IRIS ratios should be rounded: (shout-out to s10!)

All IRIS ratios are reported as percentages, rounded to the nearest percent. For the Investment Yield ratio, results are rounded to the nearest tenth of one percent. Note however, that the examiner's reports are inconsistent in following this rounding convention and the solutions provided in this article generally carry more decimals than are strictly required.

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!)

Note: This reading was recently updated to include something called Branded Risk Classifications. I think you can cover this in about 15 minutes. You can click the link for more information, but it might make more sense once you've covered the rest of the material below.

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 (1,2,3,4)

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

OVERALL Ratios	Usual Range ^{see note below}	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	[-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! - must recalc IRIS 1,2,7,10,13 (with surplus aid removed from surplus) if IRIS 4 is unusual

^note Prior versions of the IRIS Ratios source text provided unusual ranges IRIS ratios 1,2,3,4. In the most recent version, this was reversed and the source text now provides usual ranges, which is now consistent with how the acceptable ranges for the other ratios are presented.

mini BattleQuiz 1 You must be logged in or this will not work.

Profitability Ratios (5,6,7,8)

IRIS ratios 5-8 are harder to calculate. The parts of the formulas that have more pieces are indicated in brown. 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. (shout-out to TF!)

PROFITABILITY Ratios	Usual Range	Formula	Interpretation	Details
IRIS 5 F	< 100%	2-yr Operating Ratio = 2-yr Loss Ratio + 2-yr Exp. Ratio – 2-yr IIR *	low → better operating profit	- the Loss Ratio term includes dividends (see practice template) - 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	(2%, 5.5%) see ¹ below	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) / (prior yr 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%)	adjusted surplus / (prior yr surplus)	low (high) → deterioration (improvement) in financial condition due to operations	similar comments to IRIS 7

* IIR is Investment Income Ratio

¹ The acceptable range for this ratio changed from the 2018 edition. (Previously, the range was 3.0% → 6.5%, but the NEW range was lowered by 1 point to 2.0% → 5.5%)

mini BattleQuiz 2 You must be logged in or this will not work.

Liquidity Ratios (9,10)

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

^* (liquid assets) = Bonds + Stocks + (Cash, Cash Equivalents, & Short-Term Investments) + (Receivable for Securities) + (Investment Income Due & Accrued) – (Investments in Parent, Subsidiaries, & Affiliates)

(shout-out to tdaley1892!)

mini BattleQuiz 3 You must be logged in or this will not work.

Reserve Ratios (11,12,13)

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

mini BattleQuiz 4 You must be logged in or this will not work.

NAIC.IRIS

Contents

Study Tips

BattleTable

In Plain English!

Intro

Overall Ratios (1,2,3,4)

Profitability Ratios (5,6,7,8)

Liquidity Ratios (9,10)

Reserve Ratios (11,12,13)

More Old Exam Problems

Navigation menu

Personal tools

Namespaces

Variants

Views

More

Search

Navigation

Top 6 Readings

Next 6 Readings

Miscellaneous BattleReports

Other

Tools