2015.Fall.15

jcam

Why does the policy earn for only 8.5 months in 2014 when it is active for 9 full months (4/1/14-12/31/14) in 2014?

graham

They were trying to trick you. The 4th bullet point in the statement of the problem is:

• Unearned premium reserves were calculated under the monthly pro rata method, and there are no income taxes.

The monthly pro-rata method is from Exam 5 and it assumes all policies are written on the 15th of the month regardless of the date the policy was actually written. This means that annual policies are earned over 13 months. The first month always counts for 1/24th, then the next 11 months count for 1/12th, and the final month of earnings counts for 1/24th.

So even though the policy in this problem was written on Apr 1, we assume it was written on Apr 15th and so earns only 8.5 months during that year.

jcam

Thank you!