- Steps to finding out the financial status of an insurance company
- July 24, 2013
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.
About Tony Steuer
Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.