IRIS Ratios

Study guide: Exam 6U

IRIS Ratios are the thirteen property/casualty financial ratios that the NAIC's Insurance Regulatory Information System computes from each insurer's statutory annual statement and compares with a published usual range, so that state regulators can decide which insurers to look at first. They are a public screening tool, not a verdict.

\text{Ratio 2} = \frac{\text{Net premiums written}}{\text{Policyholders' surplus}}

\text{Ratio 11} = \frac{\text{One-year reserve development}}{\text{Prior year-end PHS}}

• PHS is policyholders' surplus; one-year reserve development is the change over the year in the estimate of loss and LAE for all prior accident years (payments plus remaining reserves, less last year's reserves).
• The thirteen P&C ratios and their usual ranges (NAIC IRIS Ratios Manual, 2025 edition; a result is unusual when it is equal to or beyond the bound):
  • Overall — (1) gross premiums written to PHS, below 900\%; (2) net premiums written to PHS, below 300\%; (3) change in net premiums written, -33\% to +33\%; (4) surplus aid to PHS, below 15\%.
  • Profitability — (5) two-year overall operating ratio, below 100\%; (6) investment yield, 2.0\% to 5.5\%; (7) gross change in PHS, -10\% to +50\%; (8) change in adjusted PHS, -10\% to +25\%.
  • Liquidity — (9) adjusted liabilities to liquid assets, below 100\%; (10) gross agents' balances in collection to PHS, below 40\%.
  • Reserves — (11) one-year and (12) two-year reserve development to PHS, each below 20\%; (13) estimated current reserve deficiency to PHS, below 25\%.
• The ranges are reviewed every year and have moved (the investment-yield band in particular), so cite the current manual.
• Reading them together. Ratios 1–2 measure leverage; 3, 7 and 8 flag rapid change; 5–6 profitability; 9–10 liquidity; 11–13 reserve adequacy, built from Schedule P Part 2. A positive development ratio means reserves were deficient. Ratio 4 warns that ceding commissions may be flattering the others.
• What an unusual value means. Only that the insurer merits a closer look. The manual says outright that stable insurers can fall outside several ranges in a volatile year — surplus is the denominator of many ratios, so an equity-market fall moves many at once — and that no state should rely on IRIS as its only surveillance.
• Where it sits. IRIS results are public; the NAIC's regulator-only scoring tools and the Analyst Team build on them within Solvency Monitoring. Unlike Risk-Based Capital, an IRIS result carries no legal consequence.

Two-Year Overall Operating Ratio An insurer reports, in $$$$$ millions (current year, prior year): losses and LAE incurred 400, 350; policyholder dividends 5, 5; earned premium 520, 480; other underwriting expenses 160, 150; other income 2, 2; net written premium 540, 500; net investment income 40, 36. Compute IRIS ratio 5.

Answer

\begin{align*}
\text{Loss ratio} &= \frac{400 + 350 + 5 + 5}{520 + 480} \\
&= 76.0\% \\
\text{Expense ratio} &= \frac{160 + 150 - 2 - 2}{540 + 500} \\
&= 29.4\% \\
\text{Investment income ratio} &= \frac{40 + 36}{520 + 480} \\
&= 7.6\% \\
\text{Operating ratio} &= 76.0 + 29.4 - 7.6 \\
&= 97.8\%
\end{align*}

Reported as 98\%: inside the usual range. Underwriting alone runs at about 105\%; investment income turns it into a small operating profit.

Leverage and Reserve Development The same insurer has policyholders' surplus of \$180 million this year-end and \$170 million last year-end. Schedule P shows one-year reserve development of +\$38 million. Compute ratios 2 and 11 and interpret them with the 98\% operating ratio.

Answer

\begin{align*}
\text{NPW to PHS} &= \frac{540}{180} \\
&= 300\% \\
\text{One-year development} &= \frac{38}{170} \\
&= 22.4\%
\end{align*}

Both are unusual: 300\% is equal to the bound, and 22\% exceeds 20\%.

The development ratio says last year's reserves were short by more than a fifth of last year's surplus — so that surplus, and the leverage computed on it, were overstated. If this year's reserves are set the same way, the 98\% operating ratio is flattered too, which is what ratio 13 tests. The analyst's next steps: Schedule P Part 2 by line and accident year to locate the deficiency, and ratio 12 — if two-year development is persistently worse than one-year, the manual flags possible deliberate under-reserving and an on-site examination may be needed.