Examprep.docx

School: CUNY John Jay College of Criminal Justice - Course: FIS MISC - Subject: Accounting

Chapter 8 1.What characteristics of the insurance business make reserves necessary? Reserve is a stated amount or percent of liquid assets that an insurer must have on hand that will satisfy all claims from in-force insurance policies and other outstanding liabilities. Insurance company needs to maintain the amount of its liability to meet policy obligations as policies mature. 2.Is the life insurance policy reserve more analogous to an unearned premium reserve or a loss reserve in the property and liability field? It is similar with the Unearned premium reserve; the insurance company has to have an adequate reserve to enable to meet its policy obligations 3.Define the unearned premium reserve and briefly explain how it is calculated. Why is the unearned premium reserve often referred to as the "reinsurance reserve"? Unearned premium reserve are liabilities that are not yet covered. It shows the total amount of premiums written but are not yet earned. It is calculated by extracting the amount earned during the year from the total annual premium. Amount earned is calculated by monthly amortize the total premiums written during the year. Reinsurance company, will look at the insurance company unearned premium reserve in order to give a reinsurance protection to make sure that insurance company has a sufficient fund to pay claims 4.What does it mean to say that a reserve is redundant? What type of reserves are considered to be redundant? Why? Because 90% of the cost made by insurance company originates with the cost of writing a new/renewal insurance policy, and that expenses are charged against revenue, yet insurance company still required to established reserve equal to the entire premium policy. Unearned premium reserve is considered as a redundancy, because insurance company needs to have a reserve equal to the entire premium policy. Policy reserve on life insurance also considered to have a redundancy, since the calculation for assumption use to calculate the reserve is higher than the actual value 5.The XYZ Insurance Company had an unearned premium reserve of $20 million at the end of 2006. During 2007, it wrote $25 million in annual premiums. At the end of 2007, its unearned premium reserve was $23 million. What were the earned premiums during 2007? 6.The XYZ Insurance Company had loss reserves of $7 million at the end of 2006. During 2007, it paid $7 million in losses, and had loss reserves in the amount of $6 million at the end of 2007. What were the incurred losses for 2007? The incurred losses on 2007 is 6 million. The amount of 7 million is an incurred loss for 2006, although it is paid in 2007, but the losses already recognized in 2006 because the company have to use accrual basis accounting method