How Does the Insurance Regulatory Information System (IRIS) Work?
The Insurance Regulatory Information System, or IRIS, is designed to improve the effectiveness of regulatory activities and, by extension, aid the public. It analyzes information from insurers’ financial statements and calculates a set of ratios for each company. State regulators are notified of any ratios that fall below the standard thresholds as they may indicate financial challenges and require regulatory action.
IRIS is not intended to replace each state insurance department’s monitoring processes but instead helps allocate resources to where they are most needed.
Key Facts About IRIS
- IRIS is managed by the National Association of Insurance Commissioners (NAIC).
- IRIS is a collection of tools and databases that help state insurance departments regulate insurers and protect insurance consumers.
- IRIS calculates ratios that indicate the financial health of the insurance companies monitored by the NAIC and state insurance departments.
The NAIC started using financial ratios in 1972 to evaluate the financial condition of insurance providers, with this system formally earning its name of IRIS seven years later. Chief insurance regulators from all 50 states, Washington, D.C. and five U.S. territories govern the NAIC, which provides data and analyses to optimize the regulation of the insurance industry.
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.
Eric EstevezLicensed Independent Insurance Broker and Owner of HLC Insurance Broker, LLCEric Estevez is an independently licensed life insurance agent who serves as a financial professional for a multinational corporation. Upon graduating from William Paterson University with a bachelor’s degree in accounting, Eric kickstarted his career as a financial institution auditor. His first day on the job was Sept. 15, 2008…
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.
IRIS ratios provide a helpful, standardized snapshot of a company’s financial condition and operating success across various categories. On an annual basis, the NAIC sends each company its ratio results.
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.
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What Happens When a Company’s Ratios 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 to determine what action levels and resources are required, if any.
However, some of the factors that influence a ratio result can be out of the issuer’s control. In fact, it isn’t unusual for financially stable insurers to have several ratios with results that fall outside the standard range, according to the NAIC.
Factors that Can Influence a Company’s Ratio:
- Rises or declines in equity markets
- Data validation failures
- Material accounting errors
- Changes in corporate structure
- Restatements of prior periods
Source: National Association of Insurance Commissioners
While a ratio outside the standard range warrants further review of the company, it doesn’t always indicate insolvency.
What Are IRIS-Branded Risk Classifications?
Branded risk classifications are specific areas of risk that warrant scrutiny when an insurance company has a ratio result that falls outside the range of normalcy.
As illustrated below, IRIS has nine branded risk classifications:
| Risk | Symbol | Description |
| Credit | CR | Amounts collected are less than those contractually due or payments aren’t made in a timely manner |
| Legal | LG | Nonconformance with laws, rules, regulations and ethical standards that disrupt business and finances |
| Liquidity | LQ | Inability to meet contractual obligations due to being unable to liquidate assets |
| Market | MK | Movement in market rates or prices that adversely affect the market value of investments |
| Operational | OP | Risk of financial loss due to failed internal processes, personnel and systems |
| Pricing/Underwriting | PR/UW | Pricing and underwriting practices are inadequate and risky |
| Reputation | RP | Negative publicity with a decline in customer base |
| Reserving | RV | Actual losses or other contractual payments reflected in reported reserves are greater than predicted |
| Strategic | ST | 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.
Because of this primary limitation, the NAIC notes five key considerations when accessing IRIS rations and complementary tools.
5 Key Considerations for IRIS Limitations
- IRIS and its tools cannot be a state’s only form of surveillance.
- Licensing and other important decisions should not be solely based on an insurer’s ratios without futher analysis or examination.
- The validity of the ratio results largely depends on the interpretation of financial analysts and examiners.
- IRIS ratio components and criteria are reviewed annually to ensure their range values and usefulness are valid for the current economic period.
- Although IRIS report information is routinely compiled from sources to be reliable, accuracy isn’t guaranteed.
Source: NAIC
Who Does the Insurance Regulatory Information System (IRIS) Help?
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 commissioners 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.
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Insurance Company Compliance and Reporting Requirements of IRIS
Insurance providers are required to file annual and quarterly financial statements with the NAIC, which emphasizes accurate, complete and on time submissions. 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 the NAIC, the organization that runs IRIS, on a quarterly basis.
Editor Tori Roughley contributed to this article.
