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.
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.
By Tony Steuer, CLU, LA, CPFFE
Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit https://tonysteuer.com/ to join the GET READY! Financial Preparedness Club and access free resources.