What it means
Insurers file detailed financial statements with state regulators every year. IRIS takes those statements and calculates a standard set of ratios, covering areas such as profitability, premium growth, reserves and the size of the capital cushion.
A ratio that falls outside its usual range is flagged for review. The flags are an early warning, not a verdict.
An insurer can fall outside a range for a harmless reason, for example because it is growing fast or has just reorganised, and regulators look at the reasons before taking any action. Several flags together draw more attention than one.
A key idea behind many of the ratios is leverage, which here means how much business the insurer writes compared with the capital it holds. The capital cushion is called policyholders' surplus, which is the difference between assets and liabilities available to absorb unexpected claims.
If premiums are large compared with surplus, a bad year could threaten the company's ability to pay. IRIS is a screening aid and sits alongside other regulatory tools, such as risk-based capital requirements and on-site examinations.
It is not a rating of an insurer's quality, and it is not designed for the public, but its logic is widely used in analysis. Finance professionals who buy insurance or deal with insurers can use similar ratios to assess counterparty strength.
For a business, the relevance is practical. If a company is placing a large policy or relying on an insurer to pay big claims, it wants to know that the insurer can pay when the time comes, and ratio screening is one of several ways of gaining comfort.
The ranges are set by the regulator and can be revised over time. Users should therefore check the latest published guidance before relying on any specific number.
In practice
Real-world examples.
Example
A state insurance department runs IRIS ratios on all insurers licensed in the state. It sorts the insurers by number of flagged ratios and sends its examiners first to those with the most.
Example
A risk manager at a manufacturing company reviews its main property insurer before renewing a large policy. She calculates a few similar ratios from the insurer's public filings and finds that premium growth is much faster than surplus growth.
Example
A broker advises a client to spread a very large cover across two insurers. He explains that one insurer's ratios have been outside their usual ranges for two years, which raises the question of whether it could pay a large claim.
Formula
Calculation
Net premiums written to policyholders' surplus = Net premiums written / Policyholders' surplus x 100%
Suppose an insurer writes net premiums of $90,000,000 in the year and holds policyholders' surplus of $40,000,000. The ratio is 90,000,000 / 40,000,000 = 2.25, or 225%.
For illustration, assume the usual range for this ratio is an upper limit of 300%. Since 225% is below 300%, the insurer would not be flagged on this ratio. If premiums grew to $140,000,000 with the same surplus, the ratio would be 140,000,000 / 40,000,000 = 3.5, or 350%, and it would be flagged for review.Case study
Seen in the real world.
Summit Mutual Assurance is an illustrative, fictional property insurer that expanded quickly into coastal homeowners' cover. Its premiums grew by 60% in a year, while its surplus grew by only 10%.
When the regulator ran its ratio screen, the premium to surplus ratio moved from 180% to roughly 262%, still under a hypothetical limit of 300%, but premium growth was flagged as unusually high. The regulator asked the company to explain its reinsurance arrangements and its plan for raising capital.
The company showed that it had bought reinsurance to pass on much of the coastal risk and agreed to add $15 million of capital. In this illustrative story, the flag led to a conversation rather than a penalty, which is how the tool is meant to work.
Watch out
Common mistakes.
- Treating a flagged ratio as proof that an insurer is in trouble, when it is only a prompt for review.
- Confusing IRIS with a credit rating from an agency, when it is a regulatory screening tool with a different purpose.
- Using one ratio on its own, when the value comes from looking at several ratios and how they change over time.
Questions
People also ask.
Who runs the Insurance Regulatory Information System?
It was developed by the National Association of Insurance Commissioners, and state insurance regulators use it to screen insurers.
What does policyholders' surplus mean?
It is the amount by which an insurer's assets exceed its liabilities, and it acts as the cushion that absorbs unexpected losses.
Does an insurer with no flags have no risk?
No, passing the ratio screen means no obvious warning signs from the numbers, but it does not guarantee the insurer's future strength.
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