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III IC-46 practice questions

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Question 1General Insurance Accounts Preparation

In an insurance company's general ledger, a premium received in advance for a policy period that has not yet started is best classified as which of the following?

  1. A contingent asset, because the outcome depends on claims
  2. Revenue, because cash has already been received
  3. A liability, because the cover has not yet been provided Correct answer.
  4. An intangible asset, because it represents future income

Explanation

Unearned premium represents cover not yet provided, so the insurer owes a service rather than having earned income. It is carried as a liability until the risk period elapses, at which point it is released to revenue. Cash receipt alone does not create revenue under accrual accounting.

Question 2General Insurance Accounts Preparation

An insurer writes a policy with a gross premium of 4,000, of which 400 is commission payable and 300 is premium tax. What is the net premium written recorded in the underwriting account?

  1. 3,700
  2. 3,300 Correct answer.
  3. 4,000
  4. 3,600

Explanation

Net premium written is gross premium written less commission and less premium taxes and levies charged to the insurer. Deducting both 400 and 300 from 4,000 gives 3,300. Net premium is the figure carried into the underwriting result before claims and expenses.

Question 3General Insurance Accounts Preparation

Which accounting concept requires that claims incurred in a financial year be recognised in that year even if the claim is reported to the insurer after the year end?

  1. The prudence concept
  2. The consistency concept
  3. The going concern concept
  4. The accruals concept Correct answer.

Explanation

The accruals concept requires income and costs to be matched to the period to which they relate, not the period in which cash moves or notification arrives. An incurred but not reported claim therefore belongs to the year in which the insured event happened. Prudence supports provisioning but is not the matching rule itself.

Question 4General Insurance Accounts Preparation

An insurer holds a claims reserve of 250,000 at the start of the year and 310,000 at the end. Claims paid during the year were 900,000. What is the claims incurred figure for the year?

  1. 1,210,000
  2. 840,000
  3. 900,000
  4. 960,000 Correct answer.

Explanation

Claims incurred equals claims paid plus closing outstanding claims less opening outstanding claims. That is 900,000 plus 310,000 minus 250,000, giving 960,000. The increase in the reserve represents claims relating to the year that remain unsettled.

Question 5General Insurance Accounts Preparation

In an insurance broker's accounts, a client premium held in a designated client bank account should be presented as which of the following?

  1. A liability to the client or insurer, matched by the client bank balance Correct answer.
  2. An offset against the broker's own trade payables
  3. Cash belonging to the broker, with no corresponding liability
  4. Revenue of the broker in the period received

Explanation

Client money is held on trust or in a designated account and is not the broker's own asset. It is recorded as cash in the client account with an equal liability to the party entitled to it. Recognising it as revenue would overstate the broker's income, since only commission is earned.

Question 6General Insurance Accounts Preparation

A reinsurance treaty is recorded on a broking account. Which entry correctly reflects a reinsurance premium ceded by the cedant?

  1. Debit reinsurance premium payable, credit reinsurance recoveries
  2. Debit reinsurance premium ceded, credit reinsurer's current account Correct answer.
  3. Debit claims incurred, credit reinsurance premium ceded
  4. Debit cash, credit reinsurance commission

Explanation

Ceding premium is a cost to the cedant, recorded as a debit to the reinsurance premium ceded account. The corresponding credit sits in the reinsurer's current account as an amount owed. Reinsurance recoveries relate to claims, not to premium ceded.

Question 7General Insurance Accounts Preparation

Which of the following best describes the purpose of the underwriting account in an insurer's general insurance accounts?

  1. To record the movement in the insurer's share capital
  2. To reconcile the bank statement to the cash book
  3. To show the profit or loss arising from accepting insurance risk before investment return Correct answer.
  4. To record investment income earned on shareholders' funds

Explanation

The underwriting account matches premiums earned against claims incurred and underwriting expenses for the period. It produces an underwriting result that excludes investment income, which is reported separately. This separation lets users see whether the insurance book itself is profitable.

Question 8General Insurance Accounts Preparation

An insurer's premium income for the year is 800,000, of which 200,000 relates to the following financial year. What is the earned premium for the current year?

  1. 200,000
  2. 1,000,000
  3. 600,000 Correct answer.
  4. 800,000

Explanation

Earned premium is the portion of written premium relating to cover provided in the current period. Removing the 200,000 relating to the following year leaves 600,000 earned. The deferred portion is carried as unearned premium.

Question 9General Insurance Accounts Preparation

Which item would normally be treated as an acquisition cost in a general insurer's underwriting account?

  1. Depreciation of the head office building
  2. Audit fees for the annual accounts
  3. Interest paid on subordinated debt
  4. Commission paid to intermediaries on new policies Correct answer.

Explanation

Acquisition costs are the expenses of obtaining and writing new business, of which intermediary commission is the classic example. They are matched against the premium they helped to generate. Depreciation, interest and audit fees are administrative or financing costs, not acquisition costs.

Question 10General Insurance Accounts Preparation

A claim of 60,000 is settled for 45,000 after a salvage recovery of 15,000 is agreed with the insured. How should the net claim cost be recorded in the underwriting account?

  1. 45,000 net of salvage within claims incurred Correct answer.
  2. 15,000 as a sundry creditor only
  3. 60,000 gross with salvage shown as other income below the underwriting result
  4. 60,000 in claims incurred and 15,000 as a reduction of premium

Explanation

Salvage and subrogation recoveries reduce the cost of the claim and are conventionally netted within claims incurred. Recording the claim at 45,000 reflects the true cost to the insurer. Showing salvage below the underwriting line would misstate the underwriting result.

Question 11General Insurance Accounts Preparation

Which of the following is the correct treatment of an outstanding claims provision that is later found to be excessive when the claim is settled?

  1. The excess is added to share capital
  2. The excess is credited to claims incurred in the period of settlement Correct answer.
  3. The excess is carried forward indefinitely as a deferred credit
  4. The excess is debited to claims incurred in the period of settlement

Explanation

When a claim settles for less than the provision held, the release of the excess reduces claims cost in the period the release occurs. It is credited to claims incurred, improving that period's result. Carrying the surplus forward indefinitely would misstate later periods.

Question 12General Insurance Accounts Preparation

An insurer uses a 365ths method for unearned premium. A policy written on 1 October for a 12-month term has a gross premium of 1,200. What is the unearned premium at 31 December of the same year?

  1. 300
  2. 100
  3. 900 Correct answer.
  4. 1,200

Explanation

Three months of cover have elapsed by 31 December, leaving nine months unexpired. Nine twelfths of 1,200 is 900, which is carried as unearned premium. The 300 earned is released to the underwriting account.

Question 13General Insurance Accounts Preparation

Which of the following best explains why an insurer reports both a gross and a net underwriting result?

  1. Gross is prepared for tax and net for regulatory reporting only
  2. Gross includes investment income while net excludes it
  3. Gross is prepared on a cash basis and net on an accruals basis
  4. Gross shows performance before reinsurance, net shows the result retained after ceding risk Correct answer.

Explanation

The gross result measures the book before the effect of reinsurance, while the net result shows what the insurer retains after ceding premium and recovering claims. Presenting both allows users to see the impact of reinsurance strategy. Neither figure is defined by the inclusion of investment income.

Question 14General Insurance Accounts Preparation

A general insurer's combined ratio is 108%. Which conclusion follows?

  1. The insurer made an underwriting loss before investment income Correct answer.
  2. The insurer's solvency margin is 108% of the requirement
  3. The insurer's investment return was 8%
  4. The insurer made an underwriting profit of 8%

Explanation

A combined ratio above 100% means claims and expenses exceeded earned premium, producing an underwriting loss. The 8% excess is the size of that loss relative to earned premium. Investment income may still produce an overall profit, but the underwriting result alone is negative.

Question 15General Insurance Accounts Preparation

Which of the following would be classified as an administrative expense rather than a claims expense in a general insurer's accounts?

  1. Payments to loss adjusters on a large fire claim
  2. Cost of assessing and settling a reported claim
  3. Salaries of staff handling policy administration Correct answer.
  4. Legal defence costs on a liability claim

Explanation

Policy administration salaries support the running of the business and are administrative expenses. Claims handling costs, loss adjusters' fees and defence costs are incurred in settling claims and form part of claims expense. The distinction affects the expense ratio but not the total result.

Question 16General Insurance Accounts Preparation

An insurer receives a premium of 2,400 on 1 April for a 12-month policy and pays commission of 15%. Under a 365ths basis, what is the unearned premium at the following 31 December?

  1. 1,800
  2. 900
  3. 600 Correct answer.
  4. 2,040

Explanation

Nine months of cover have elapsed by 31 December, leaving three months unexpired. Three twelfths of 2,400 is 600, which remains unearned. Commission affects the acquisition cost, not the gross unearned premium calculation.

Question 17General Insurance Accounts Preparation

Which of the following statements about the treatment of deferred acquisition costs is correct?

  1. Acquisition costs are capitalised as an intangible asset with no amortisation
  2. Acquisition costs are deducted from share premium
  3. Acquisition costs are deferred and amortised in line with the earning of premium Correct answer.
  4. All acquisition costs are expensed immediately in the year the policy is written

Explanation

Acquisition costs are matched to the premium they helped to generate, so a portion is deferred and released as the premium is earned. This avoids distorting the result of the year of writing. Immediate expensing would understate profit in a growth year.

Question 18General Insurance Accounts Preparation

An insurer's ledger shows an amount due from a reinsurer for a paid claim. How should this be presented?

  1. As an item of other comprehensive income
  2. As a reduction of premium written
  3. As a deduction from gross claims incurred to arrive at net claims Correct answer.
  4. As an addition to gross claims incurred

Explanation

Reinsurance recoveries on paid claims reduce the insurer's net cost of claims. They are deducted from gross claims incurred so that net claims reflect the retained risk. Treating them as premium or as other comprehensive income would misstate both the underwriting result and the balance sheet.

Question 19General Insurance Accounts Preparation

Which of the following is the primary purpose of a trial balance in the preparation of an insurer's accounts?

  1. To calculate the insurer's solvency capital requirement
  2. To determine the amount of premium tax payable
  3. To prove the arithmetical accuracy of the double-entry postings Correct answer.
  4. To record claims notified after the year end

Explanation

A trial balance lists ledger balances and confirms that total debits equal total credits, revealing posting errors. It is a bookkeeping control rather than a regulatory or tax calculation. Solvency capital and tax are derived from separate computations.

Question 20General Insurance Accounts Preparation

An insurer's earned premium is 500,000, claims incurred are 320,000 and underwriting expenses are 130,000. What is the expense ratio?

  1. 26% Correct answer.
  2. 64%
  3. 13%
  4. 90%

Explanation

The expense ratio expresses underwriting expenses as a percentage of earned premium. Dividing 130,000 by 500,000 gives 26%. The claims ratio would be 64%, and the combined ratio 90%.

Question 21General Insurance Accounts Preparation

Which of the following best describes the treatment of an insurance policy that is cancelled mid-term with a pro rata refund?

  1. The refund reduces written premium and the unearned premium is released accordingly Correct answer.
  2. The refund is recorded as a claims payment
  3. The refund is charged to administrative expenses
  4. The refund is recognised as a gain on disposal of an asset

Explanation

A pro rata cancellation returns the unearned portion of the premium, so written premium is reduced and the corresponding unearned premium liability is released. The net effect is that the insurer keeps only the premium for the cover already provided. It is not a claim or an expense.

Question 22General Insurance Accounts Preparation

Which of the following is a correct description of the relationship between the balance sheet and the underwriting account?

  1. The underwriting account balance is always equal to the cash balance
  2. The balance sheet records only investment assets, while the underwriting account records all liabilities
  3. The underwriting account and balance sheet are independent and never interact
  4. Unearned premium and outstanding claims on the balance sheet feed the underwriting account through movements Correct answer.

Explanation

The underwriting account draws on movements in balance sheet items such as unearned premium and outstanding claims. A rise in the claims reserve increases claims incurred, while a rise in unearned premium defers premium. The two statements are therefore closely linked through period movements.

Question 23General Insurance Accounts Preparation

An insurer writes a policy with a gross premium of 5,000 and pays commission of 500. Using a 365ths basis, what is the deferred acquisition cost at the end of the first three months of a twelve-month policy?

  1. 500
  2. 250
  3. 125
  4. 375 Correct answer.

Explanation

Three months of the twelve have elapsed, so nine twelfths of the commission remains deferred. Nine twelfths of 500 is 375. The remaining 125 is the commission expense matched to the elapsed cover.

Question 24General Insurance Accounts Preparation

Which of the following describes the correct accounting treatment of a premium refund paid to an insured after the policy year end in respect of the prior year's cover?

  1. It is added to the current year's written premium
  2. It is ignored because the cash moved after the year end
  3. It is recorded as a new policy in the current year
  4. It is charged against the prior year's result through the claims or premium reserve Correct answer.

Explanation

Under accruals, an event relating to the prior year's cover is reflected in that year's result, typically through a premium or claims reserve adjustment. The date of the cash movement does not determine the accounting period. Treating it as new business would misstate both years.

Question 25General Insurance Accounts Preparation

Which of the following statements about the treatment of investment income in a general insurer's accounts is correct?

  1. It is reported separately from the underwriting result and combined to give the operating result Correct answer.
  2. It is included within the underwriting result to show total performance
  3. It is netted against claims incurred
  4. It is recorded directly in equity without passing through profit or loss

Explanation

Investment income is shown separately from underwriting so that the profitability of the insurance book can be assessed on its own. The two results are then combined to give the overall operating result. This separation is a standard feature of general insurance reporting.

Question 26General Insurance Accounts Preparation

In a general insurer's revenue account, which figure represents premium earned rather than premium written?

  1. Gross written premium plus the movement in unearned premium
  2. Gross written premium less the movement in unearned premium Correct answer.
  3. Gross written premium less reinsurance commissions received
  4. Gross written premium less claims paid in the year

Explanation

Premium earned is the portion of written premium attributable to the period covered, so it equals written premium adjusted for the change in unearned premium. When unearned premium rises, earned premium is lower than written premium; when it falls, earned premium exceeds written premium. Claims paid and reinsurance commissions do not convert written premium into earned premium.

Question 27General Insurance Accounts Preparation

An insurer's unearned premium reserve at the start of the year is 240,000 and at the end is 310,000. Gross written premium for the year is 1,150,000. What is gross earned premium?

  1. 1,220,000
  2. 1,080,000 Correct answer.
  3. 1,390,000
  4. 1,150,000

Explanation

Earned premium equals written premium minus the increase in unearned premium: 1,150,000 − (310,000 − 240,000) = 1,080,000. The 70,000 increase represents premium written this year that relates to future periods. Adding the movement instead of deducting it gives the wrong direction of adjustment.

Question 28General Insurance Accounts Preparation

Which basis allocates a 12-month policy's premium to the periods it covers by counting the exact number of days remaining after the reporting date?

  1. The risk-based method
  2. The monthly pro rata method
  3. The 365ths method Correct answer.
  4. The 1/24ths method

Explanation

The 365ths method calculates unearned premium by multiplying the premium by the number of days still to run divided by 365. It is more precise than monthly methods because it recognises the exact day count. The 1/24ths method assumes each month has equal halves and is therefore an approximation.

Question 29General Insurance Accounts Preparation

A policy with a gross premium of 7,300 incepts on 1 November for a 12-month term. Using the 365ths method, what is the unearned premium at 31 December of the same year?

  1. 6,100 Correct answer.
  2. 7,300
  3. 5,500
  4. 1,200

Explanation

At 31 December, 61 days of cover have elapsed (30 in November and 31 in December), leaving 304 days unearned. Unearned premium = 7,300 × 304/365 = 6,080, which rounds to 6,100. The earned portion of about 1,200 is the complement of the answer.

Question 30General Insurance Accounts Preparation

Which cost is treated as a deferred acquisition cost in a general insurer's accounts?

  1. Interest paid on subordinated debt
  2. Salaries of the claims handling team
  3. Commission paid to an intermediary on a policy whose cover extends into the next year Correct answer.
  4. Depreciation of the insurer's office building

Explanation

Acquisition costs are the costs of obtaining and writing business, principally commission and related underwriting expenses. Where the related premium is unearned, the acquisition cost is carried forward as a deferred acquisition cost and released as the premium is earned. Claims salaries, depreciation and interest are not costs of acquiring business.

Question 31General Insurance Accounts Preparation

A policy carries a gross premium of 9,600, commission of 12.5% and is written on 1 July for 12 months. Using the 365ths method, what is the deferred acquisition cost at 31 December?

  1. 1,200
  2. 600 Correct answer.
  3. 1,150
  4. 550

Explanation

Commission is 9,600 × 12.5% = 1,200. At 31 December, 184 days have elapsed and 181 days remain, so the deferred portion is 1,200 × 181/365 = 595, which rounds to 600. The deferred acquisition cost mirrors the unearned premium so that costs are matched with the premium they helped to write.

Question 32General Insurance Accounts Preparation

An insurer's gross written premium is 2,400,000, reinsurance premium ceded is 600,000 and reinsurance commission received is 150,000. What is net written premium?

  1. 1,800,000 Correct answer.
  2. 2,250,000
  3. 1,650,000
  4. 2,400,000

Explanation

Net written premium is gross written premium less reinsurance premium ceded: 2,400,000 − 600,000 = 1,800,000. Reinsurance commission received is shown separately as an offset to acquisition costs or as income, not as a deduction from premium. Confusing the two produces the wrong figure.

Question 33General Insurance Accounts Preparation

An insurer's net earned premium is 900,000, net claims incurred are 585,000 and net underwriting expenses are 225,000. What is the expense ratio?

  1. 30%
  2. 65%
  3. 40%
  4. 25% Correct answer.

Explanation

The expense ratio is net underwriting expenses divided by net earned premium: 225,000 ÷ 900,000 = 25%. The claims ratio is 585,000 ÷ 900,000 = 65%, and the combined ratio is 90%. Expense ratios are always expressed against earned premium, not written premium, when testing underwriting performance.

Question 34General Insurance Accounts Preparation

An insurer reports a combined ratio of 96% and an expense ratio of 28%. What is the claims ratio?

  1. 72%
  2. 124%
  3. 68% Correct answer.
  4. 76%

Explanation

The combined ratio is the sum of the claims ratio and the expense ratio, so the claims ratio is 96% − 28% = 68%. A combined ratio below 100% indicates an underwriting profit before investment income. Adding the two ratios would be meaningless.

Question 35General Insurance Accounts Preparation

Which item is deducted from gross claims incurred to arrive at net claims incurred in the revenue account?

  1. Claims recovered from reinsurers Correct answer.
  2. The movement in the unearned premium reserve
  3. Salvage and subrogation recoveries received from third parties
  4. Commission paid to intermediaries

Explanation

Net claims incurred are gross claims incurred less amounts recoverable under reinsurance treaties, because the insurer has transferred that part of the risk. Salvage and subrogation recoveries reduce the gross claim itself before reinsurance is applied. Unearned premium and commission have no place in the claims line.

Question 36General Insurance Accounts Preparation

A general insurer receives a large claim from an insured and expects to recover 70% of it from its reinsurer. How should the gross claim be recorded when it is notified?

  1. As a net claim only, with no gross amount recorded
  2. As a reduction of gross written premium
  3. As a gross claims incurred item with a separate reinsurance recoveries debtor Correct answer.
  4. As an administrative expense in the period

Explanation

Under gross accounting, the insurer recognises the full claim as gross claims incurred and separately recognises the reinsurance recoverable as an asset. This keeps gross and net underwriting results transparent to users. Netting the claim down to the recoverable amount obscures the insurer's exposure and is not permitted in the revenue account.

Question 37General Insurance Accounts Preparation

Which statement correctly describes the treatment of an insurer's technical provisions in the balance sheet?

  1. They are deducted from share capital in the equity section
  2. They are disclosed only in the notes and not on the face of the balance sheet
  3. They are liabilities representing obligations to policyholders and are shown separately from shareholders' funds Correct answer.
  4. They are assets representing amounts recoverable from reinsurers

Explanation

Technical provisions, including unearned premium and outstanding claims reserves, are liabilities because they represent obligations the insurer must settle. They are presented separately from capital and reserves so that users can assess the insurer's funding position. Reinsurance recoveries are separate assets, not part of the provisions themselves.

Question 38General Insurance Accounts Preparation

An insurer's outstanding claims reserve at the year end is 480,000, of which 120,000 is expected to be recovered from reinsurers. How should this be presented?

  1. A net liability of 480,000 with the recovery disclosed only in the notes
  2. A gross liability of 120,000 and an asset of 480,000
  3. A net liability of 360,000 only
  4. A gross liability of 480,000 and a reinsurance recoverable asset of 120,000 Correct answer.

Explanation

Gross accounting requires the full claims obligation to be shown as a liability, with the reinsurance recoverable recognised separately as an asset. This gives a faithful picture of both the insurer's obligations and its recoveries. Presenting only the net figure hides the gross exposure from users of the accounts.

Question 39General Insurance Accounts Preparation

Which accounting concept requires an insurer to recognise a claim liability for incidents that have occurred but have not yet been reported by the insured?

  1. The accruals concept Correct answer.
  2. The going concern concept
  3. The materiality concept
  4. The consistency concept

Explanation

The accruals concept requires expenses to be recognised in the period in which the underlying event occurred, regardless of when the claim is reported. An incurred but not reported reserve therefore matches the liability with the premium earned in the same period. Going concern, consistency and materiality do not by themselves require this recognition.

Question 40General Insurance Accounts Preparation

An insurer's prior year claims reserve of 500,000 is settled for 460,000. How is the 40,000 difference reported?

  1. As a reduction in deferred acquisition costs
  2. As an increase in gross written premium
  3. As a release of the excess reserve, increasing the current year's underwriting result Correct answer.
  4. As a direct credit to share capital

Explanation

When a prior year reserve proves excessive, the release is recognised in the current year's revenue account and improves the current year's result. This is commonly called prior year development or reserve release. It is not premium, not an acquisition cost adjustment and never a direct equity movement.

Question 41General Insurance Accounts Preparation

Which of the following is the correct treatment of an insurer's investment return in the revenue account?

  1. It is shown separately from the underwriting result and added to arrive at the overall result Correct answer.
  2. It is netted against acquisition costs
  3. It is deducted from claims incurred
  4. It is included within gross written premium

Explanation

Investment return is presented as a separate line because it arises from the investment of float rather than from underwriting activity. Adding it to the underwriting result gives the overall pre-tax result for the period. Mixing it with premium or claims would obscure the underwriting performance.

Question 42General Insurance Accounts Preparation

An insurer collects premium of 300,000 on behalf of another insurer under a fronting arrangement and is entitled to retain 10% as a fee. Which amount should be recognised as the insurer's own premium?

  1. 300,000
  2. 30,000 Correct answer.
  3. 330,000
  4. 270,000

Explanation

Where the insurer acts only as a fronting carrier and passes the risk on, it recognises only the fee it retains as its own income rather than the full premium collected. The remainder is a liability to the other insurer. Recognising the full premium would overstate the insurer's turnover and exposure.

Question 43General Insurance Accounts Preparation

An insurer has net earned premium of 1,200,000, net claims incurred of 780,000, net expenses of 300,000 and investment return of 90,000. What is the overall pre-tax result?

  1. 210,000 profit Correct answer.
  2. 120,000 profit
  3. 30,000 profit
  4. 300,000 profit

Explanation

The underwriting result is 1,200,000 − 780,000 − 300,000 = 120,000, and adding investment return of 90,000 gives 210,000. The combined ratio is 90%, confirming an underwriting profit before investment income. Investment return must be added, not deducted.

Question 44General Insurance Accounts Preparation

Which of the following best explains why an insurer's balance sheet shows a deferred acquisition cost asset alongside an unearned premium liability?

  1. The deferred cost offsets the liability so that neither appears in the accounts
  2. The unearned premium is an asset because it will be earned in future periods
  3. Both arise from the same unexpired risk and are released together as the premium is earned Correct answer.
  4. The deferred cost is an asset because commission is refundable on cancellation

Explanation

Commission paid on unearned premium is carried forward so that it is expensed in the same periods as the premium it helped to write. Both balances therefore run off together as cover is provided. The deferred cost does not offset the liability, and unearned premium is a liability, not an asset.

Question 45General Insurance Accounts Preparation

An insurer's accounts show a claims ratio of 72%, an expense ratio of 31% and investment return equal to 6% of net earned premium. What is the underwriting margin?

  1. −9%
  2. −3% Correct answer.
  3. 9%
  4. 3%

Explanation

The combined ratio is 72% + 31% = 103%, so the underwriting margin is 100% − 103% = −3%, an underwriting loss. Investment return is excluded from the underwriting margin because it arises from investments rather than underwriting. Including it would give an overall margin of 3%.

Question 46General Insurance Accounts Preparation

Which of the following correctly describes the treatment of a no-claims bonus granted at renewal to an insured?

  1. It reduces the premium charged and is accounted for as a reduction in written premium Correct answer.
  2. It is capitalised as a deferred acquisition cost
  3. It is recorded as an administrative expense
  4. It is recorded as a claims expense when granted

Explanation

A no-claims bonus is a pricing adjustment that reduces the premium payable, so it is accounted for as a reduction in gross written premium. It is not a claim because no loss event has occurred. Treating it as an expense would overstate both premium and costs.

Question 47General Insurance Accounts Preparation

An insurer's trial balance shows a credit balance on the unearned premium account of 180,000 at the year end. How does this affect the preparation of the financial statements?

  1. It is presented as an asset and increases earned premium
  2. It is presented as a liability in the balance sheet and reduces earned premium in the revenue account Correct answer.
  3. It is closed to share capital at the year end
  4. It is netted against claims incurred in the revenue account

Explanation

A credit balance on unearned premium represents premium received for cover not yet provided, so it is a liability carried forward. In the revenue account it reduces written premium to the earned figure for the period. It is not an asset and is never netted against claims.

Question 48General Insurance Accounts Preparation

Which of the following best explains the purpose of a bordereau in the preparation of an insurer's reinsurance accounts?

  1. It provides a periodic statement of premiums, claims and commissions ceded under a treaty for reconciliation Correct answer.
  2. It is the legal document that transfers risk to the reinsurer
  3. It is the internal ledger used to record administrative expenses
  4. It is the invoice issued to the policyholder for premium

Explanation

A bordereau is a periodic schedule listing the transactions ceded to the reinsurer, such as premiums, claims and commissions, and is used to reconcile the treaty account. It supports the amounts recorded in the reinsurance accounts. It is not the treaty itself, a policyholder invoice or an expense ledger.

Question 49General Insurance Accounts Preparation

An insurer writes a policy with gross premium of 4,800 on 1 April for 12 months and pays commission of 20%. Using the 365ths method, what is the net earned premium at 31 December of the same year?

  1. 2,880
  2. 1,200
  3. 3,600 Correct answer.
  4. 4,800

Explanation

At 31 December, 275 days have elapsed, so earned premium is 4,800 × 275/365 = 3,616, which rounds to 3,600. Commission is an acquisition cost and does not change earned premium; it affects the deferred acquisition cost and the expense line. The unearned balance is about 1,200.

Question 50General Insurance Accounts Preparation

Which of the following correctly describes the treatment of a policy cancelled mid-term with a pro rata refund?

  1. The refund is recorded as a claims expense in the year of cancellation
  2. The refund is capitalised and amortised over the remaining term
  3. The refund reduces written premium and the unearned premium reserve is released accordingly Correct answer.
  4. The refund is charged directly to retained earnings

Explanation

On a pro rata cancellation, premium for the unexpired period is refunded, so written premium is reduced and the corresponding unearned premium released. The deferred acquisition cost relating to the unexpired period is also released. A refund is not a claim because no insured loss has occurred.