FA Module 20: Insurance contracts: GAAP – homework assignment

(The attached PDF file has better formatting.)

Homework assignment: Insurance contracts with premium deficiency: GAAP

On July 1, 20X1, an insurer writes a motor insurance contract with a one year term and collects a premium of 500. The cash received is held in a non-interest bearing checking account. The estimated claims for the policy year are 400. To compute the percentage of the policy term that has been earned, assume six months is half a year.

Expenses paid at policy inception are

●    Agents’ commission = 10% of premium
●    Underwriting costs = 40
●    Modifications to a web site = 20 (not deferrable)

On November 15, 20X1, a claim of 60 is paid. At December 31, 20X1,

●    the estimated costs for other incurred claims is 80 (nominal value) and 70 (present value).
●    the estimated claims for the unexpired portion of the policy are re-estimated as 275 (nominal value) and 225 (present value)

For this insurance contract:

A.    What are the assets at policy inception?
B.    What are the liabilities at policy inception?
C.    What is the revenue at policy inception?
D.    What are the expenses at policy inception?
E.    What are the assets at December 31, 20X1?
F.    What are the liabilities at December 31, 20X1?
G.    What is the revenue for 20X1?
H.    What are the expenses for 20X1?
I.    What is pre-tax income for 20X1?

(The assets, liabilities, revenue, and expenses are those stemming from the insurance contract.)

Compare your solution with the practice problems on the discussion forum. The figures differ, but the relations are the same.