Chapter 22

1. b 6. b 11. b 16. b 21. d 26. d

2. a 7. c 12. a* 17. d 22. d 27. d
3. a 8. a 13. d* 18. a 23. c 28. d
4. c 9. c 14. a* 19. d 24. d 29. c
5. c 10, c 15, a 20. a 25. c 30. a

1-3:
To compute the motor premium income earned during the year ended December 31, 20x7, are as follows:
Gross premium written in the year……………………………………….. P3,000,000 .
Less: Premium ceded on reinsurance…………………………………… ( 300,000) .
Net premium………………………………………………………………….. P2,700,000 (1)
Less: Increase in unearned premium reserve (P1,200,000 –
P960,000)…………………………………………………………………. __240,000 (2)
Earned premium……………………………………………………………… P2,460,000 (3)

Correction: For Items 4 and 5…using the 1/365th method;

…the unexpired risk period of this policy…from January 1, 20x5 to September 30, 20x5
…the insurer has another…. written on December 31, 20x4 instead of 20x3
4. P37,500 x (273 days /365 days – 1/1/20x5-9/30/20x5) = P28,048, nearest answer is letter (c)
5. Additional data: For the Second Policy, the increased in the unearned premium on December 31, 20x4 (with an
insurance rate of 35%) …
P50,000 x (334 days /365 days – 1/1/20x5-11/30/20x5) = P45,753, nearest answer is letter (c)

6. P71,093.25 – nearest answer is letter (b)

Using the 1/24th method, the unearned premium reserve as of December 31, 20x7 amounted to P89,895.82, computed as
follows:
Unearned
Unexpired Premium
Premiums period Reserve
January………………………………….. P 18,750 1/24 P 781.250
February…………………………………. 15,625 3/24 1,953.125
March……………………………………. 12,500 5/24 2,604.167
April………………………………………. 9,375 7/24 2,734.375
May………………………………………. 12,500 9/24 4,687.500
June……………………………………… 9,375 11/24 4,296.875
July……………………………………….. 15,625 13/24 8,463.542
August…………………………………… 21,875 15/24 13,671.875
September………………………………. 21,875 17/24 15,494.792
October…………………………………. 18,750 19/24 14,843.750
November………………………………. 25,000 21/24 21,875.000
December………………………………. __21,875 23/24 _20,963.542
P203,125 P 112,369.793
In contrast, under the fixed percentage method, using the usual rate for fire insurance, which is 35%, the unearned premium
reserve as of December 31, 20x7 amounted to P71,093.75 (P203,125 x 35%). Incidentally, the summarized journal entries to
recognize the premiums written for the year and the unearned premium reserve are presented as follows:

1/24th method Fixed percentage method

Pesos Pesos
Cash/premium receivable………… 203,125 203,125
Premium revenue…………….. 203,125 203,125

Premium revenue……………………. *56,119.80 4,687.50

Unearned premium reserve… *56,119.80 4,687.50
* The UPR balance brought forward from the previous year amounted to P56,250; P112,369.793 – P56,250 = P56,119.793
** The UPR balance brought forward from the previous year amounted to P56,250;
P203,125 x 30% = P60,937.50 – P56,250 = P4,687.50

Correction: In relation to No. 6

7. c - P147,005.20 = (P203,125 – P56,119.80), refer to No. 6 for further computations.
8. a - ** The UPR balance brought forward from the previous year amounted to P56,250;
P203,125 x 30% = P60,937.50 – P56,250 = P4,687.50. refer to No. 6 for further computations.
Correction: In relation to No. 8
9. c - P198,437.50 = P203,125 – P4,687.50 refer to No. 6 for further computations.
10. c – refer to the problem
11. b – P212,000 – P126,562.50
12. * Financial guarantee contract – there is no specified uncertain future event; the payment is
required whatever happens to the debt;
Deferred annuity contract – the insurer can re-price the mortality risk, it will become an insurance contract only when the
annuity rates is fixed
Before the “loan contract”, the borrower faced no risk corresponding to the prepayment fee, thus, no risk has been
transferred.

31 b 36. c 41. a 46. d 51. c

32. a 37. c 42. b 47. a
33. b 38. a 43. a 48. b
34. c 39. c 44. d 49. d
35. d 40. a 45. c 50, c