SOFA-CFE · Question #126
Premium income is deferred by 80 percent of the increase in the reserve for _________ premiums that applies to the unexpired period of an insurance contract
The correct answer is B. unearned. Unearned premiums represent the portion of a collected premium that applies to coverage not yet provided - the unexpired period of a policy. Since the insurer still owes future coverage, that portion of income cannot be recognized yet and must be deferred; an 80% deferral of…
Question
Premium income is deferred by 80 percent of the increase in the reserve for _________ premiums that applies to the unexpired period of an insurance contract
Options
- Aearned
- Bunearned
- Cobligatory
- Dreserved
How the community answered
(24 responses)- A13% (3)
- B79% (19)
- C4% (1)
- D4% (1)
Explanation
Unearned premiums represent the portion of a collected premium that applies to coverage not yet provided - the unexpired period of a policy. Since the insurer still owes future coverage, that portion of income cannot be recognized yet and must be deferred; an 80% deferral of the increase in the unearned premium reserve is a standard accounting treatment.
Why the distractors fail:
- A (Earned): Earned premiums are already recognized as income for the expired period - deferring based on them would be contradictory.
- C (Obligatory): "Obligatory" describes a type of reinsurance treaty, not a premium reserve category relevant here.
- D (Reserved): Not a defined actuarial or accounting term for this concept; it conflates the general idea of a "reserve" with the specific unearned premium reserve.
Memory tip: Think "U"nexpired = U"nearned" - whatever coverage period hasn't expired yet is premium that hasn't been earned yet, so it stays in the unearned premium reserve and gets deferred.
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