Steps to finding out the financial status of an insurance company

Steps to finding out the financial status of an insurance company

By Tony Steuer, CLU, LA

Insurance is primarily a state-regulated industry. Each state has an Insurance Commissioner who is the primary regulatory officer and has broad oversight powers to regulate the conduct, policy provisions and financial integrity of insurance companies.

The National Association of Insurance Commissioners (NAIC) complies and issues Insurance Regulatory Information reports (IRIS), which are comprehensive analyses of the financial status of life insurance companies.

The IRIS testing process has been around since 1972, helping insurance regulators evaluate the financial condition of insurance companies they regulate, which is then routed by the NAIC to various state insurance commissioners.

Insurance Regulatory Information reports evaluate the financial status of a life insurance company.

With more than 5,000 companies filing their financial statement each year with the NAIC, the IRIS financial ratios serve as an early warning system to spot troubled companies.

Ratios measure such factors as profitability, solvency, and liquidity. Companies with poor performance are recommended for immediate action, while others are recommended for less urgent actions.

Currently, there are 12 IRIS ratios calculated for life and health insurance companies; both are reviewed annually to endure their currency and continued relevance for solvency monitoring.

There is a “usual range of results” which serves as a starting point. These ratios and trends are valuable in identifying companies who are most likely to experience financial difficulties.

IRIS reports are available to public and can be ordered from the NAIC website. The report lists ratio results for each filled company, which includes industry mean and median ratios for comparison.

A useful explanation of the IRIS system can be found in the NAIC reports. Ratios used are grouped into four categories:

Overall Ratios – Numbered 1, 2 and 3

1. Gross, net changes in capital and surplus

2. Net income to total income (including realized capital gains and losses)

3. Commissions and expenses to premiums and deposits (discontinued)

Investment Ratios – Numbered 4 thru 7

4. Adequacy of investment income

5. Non-admitted to admitted assets

6. Total real estate and total mortgage loans to cash and invested assets

7. Total affiliated investments to capital and surplus

Surplus Relief Ratio – Numbered 8

8. Gross, net changes in capital and surplus

Changes in Operations Ratios – Numbered 9 thru 12

8. Change in premium

9. Change in product mix

10. Change in asset mix

11. Change in reserving ratio

Copyright NAIC. Permission for this reprint granted by NAIC.

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