- The Insurance Regulatory Information System (IRIS) is managed by the National Association of Insurance Commissioners (NAIC).
- The IRIS is a collection of tools and databases that help state insurance departments regulate insurers and protect insurance consumers.
- IRIS ratios are the most prominent output produced by the IRIS; they provide an indication of the financial health of the insurance companies monitored by the NAIC and state insurance departments.
The NAIC instituted the Insurance Regulatory Information System, or IRIS, in 1972 to facilitate the evaluation of the financial condition of insurance providers. Chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories govern the NAIC, which provides data and analyses to optimize the regulation of the insurance industry.
How Does the Insurance Regulatory Information System (IRIS) Work?
The IRIS is not intended to replace each state insurance department’s monitoring processes; rather, it is designed to improve the effectiveness of regulatory activities and aid the public.
According to the NAIC, “the NAIC Insurance Regulatory Information System (IRIS) is a collection of analytical solvency tools and databases designed to provide state insurance departments with an integrated approach to screening and analyzing the financial condition of insurers operating within their respective states.”
Based on the financial information submitted, the IRIS calculates a set of ratios for each company.
“Wherever one stands on the issue of regulation in our free markets, it is imperative to establish trust in our institutions and markets. IRIS can do this for the insurance industry, which is the bedrock of the United States economy. Without trust, there is no growth or investment.”
What Are IRIS Ratios?
IRIS ratios help determine an insurance company’s financial solvency, which refers to its ability to pay insurance claims and other financial obligations.
The IRIS ratios provide a helpful, standardized snapshot of a company’s financial condition and operating success. On an annual basis, the NAIC sends each company their ratio results and posts a downloadable publication with all IRIS ratio results on its website.
Read More: Insurer Insolvency
The IRIS monitors 13 ratios for property and casualty insurance providers and 12 ratios for life, accident and health insurance companies. Each ratio has a distinct formula and a specified range of normalcy.
What Happens When a Company’s Ratios Fall Outside the Standard Range?
If a company’s ratio falls outside the standard range, it isn’t a blatant red flag. According to the NAIC, it isn’t unusual for financially stable insurers to have several ratios with results that fall outside the standard range.
State insurance regulators are notified if any of a company’s IRIS ratios fall outside the standard range. Then, the regulators take a closer look at the company’s data and reports. However, some of the factors that influence a ratio result can be out of the issuer’s control.
Factors that Can Influence a Company’s Ratio:
- A rise or decline in equity markets
- Data validation failures
- Material accounting errors
- Changes in corporate structure
- Restatements of prior periods
The accuracy of IRIS ratios depends on the accuracy of the company’s submitted data. If there are any errors in reporting, the errors will be reflected in the IRIS ratio results.
While a ratio outside the standard range warrants further review of the company, remember that it does not always indicate insolvency.
What Are IRIS-Branded Risk Classifications?
When an insurance company has a ratio result that falls outside the range of normalcy, specific areas of risk that warrant scrutiny are highlighted.
As illustrated below, IRIS has nine branded risk classifications:
|Amounts collected are less than those contractually due or payments aren’t made in a timely manner
|Nonconformance with laws, rules, regulations and ethical standards that disrupt business and finances
|Inability to meet contractual obligations due to being unable to liquidate assets
|Movement in market rates or prices that adversely affect the market value of investments
|Risk of financial loss due to failed internal processes, personnel and systems
|Pricing and underwriting practices are inadequate and risky
|Negative publicity with a decline in customer base
|Actual losses or other contractual payments reflected in reported reserves are greater than predicted
|Inability to implement a sturdy business plan or allocate resources
Limitations and Criticisms of IRIS
The accuracy of the IRIS ratios depends on the accuracy of the information submitted by the insurers. If erroneous information is submitted, it will be reflected in the IRIS ratio results. Beyond this primary limitation, the NAIC specifies five other key limitations of the IRIS ratios and complementary tools.
Limitations & Criticisms to Consider
- No state can rely on the tools’ results as the state’s only form of surveillance.
- Important decisions, such as licensing, should not be based on the tools’ results without further analysis or examination of the insurer.
- Valid interpretation of the tools’ results depends, to a considerable extent, on the judgment of financial analysts and examiners.
- The criteria for determining usual range values and the usefulness of the IRIS ratios, although based on the recent experience of insurers becoming insolvent, may not be valid for future experience in different economic periods. For this reason, the components of the ratios are reviewed annually.
- While the information contained in the IRIS reports is compiled in a routine manner and from sources believed to be reliable, accuracy is not guaranteed.
Who Does the Insurance Regulatory Information System (IRIS) Help?
The IRIS helps insurance regulators and consumers by informing them which companies are in danger of insolvency.
Insurance companies must follow specific regulations, including annuity regulations, established by state insurance commissions and the NAIC. These rules are in place to safeguard consumers. The importance of this cannot be understated.
If an insurance company is in financial trouble, the company may become insolvent. This means it will be unable to make good on its insurance claims and/or annuity payments
However, if state regulators can intervene before this happens, the company may be able to address its issues and avoid financial catastrophe.
Incidentally, IRIS ratios can also directly benefit insurance companies, as these indicators highlight areas of concern and encourage positive change.
Insurance Company Compliance and Reporting Requirements of IRIS
Insurance providers are required to file annual and quarterly financial statements with the NAIC. According to the NAIC, it’s crucial for insurers to submit their filings accurately, completely and on time. This facilitates the regulatory process and supports the overall health of the insurance industry, which is critical to the success of our economy.
All insurers are required to file financial statements with states they’re licensed to operate in. The data they submit feeds into the IRIS tools and databases.
Insurance providers must submit reports to NAIC, the organization that runs IRIS, on a quarterly basis.
If a company’s ratio falls outside the standard range, it will trigger a regulatory alert for the governing state or territory. This will result in an investigative effort to understand the reason for the abnormal ratio result.