19.2 Leverage Ratios
IRIS Ratios
Developed in early 1970s in the US
If companies fail 4 of 12 IRIS tests they will get regulatory scrutiny
Still in use today but less weight is given compared to other regulatory capital adequacy measures
In US prior to the 1990s (before RBC), 2 leverage ratio tests were used:
\(\dfrac{\text{Premium}}{\text{Surplus}} < 3.0\)
\(\dfrac{\text{Reserves}}{\text{Surplus}} < a\) where \(a\) is fixed (e.g. \(a=3.0\))
- This penalize long tail lines more
In EU Solvency I:
Required capital = higher of:
\(\dfrac{\text{Premium}}{\text{Surplus}}\) and \(\dfrac{\text{Incurred Claims}}{\text{Surplus}}\)And also net leverage:
\(\dfrac{\text{Premium} + \text{Reserves}}{\text{Surplus}}\)Does not distinguish between LoBs and nothing besides u/w risk