Premiums for which contracts are to be reported as prepaid reinsurance premiums and expensed over the remaining period of the reinsurance contract or over the terms of the policies reinsured?

Question

Options

• Aretroactive
• Breinsured
• Cobligatory
• Dprospective

• A
  17% (3)
• B
  6% (1)
• C
  6% (1)
• D
  72% (13)

Explanation

Prospective reinsurance contracts cover losses arising from future insured events - events that have not yet occurred at the time the contract is written. Because the coverage period extends into the future, the premium is treated as prepaid and expensed ratably over the remaining contract period or the terms of the underlying policies reinsured, matching expense recognition to the coverage being provided.

Option A (retroactive) is wrong because retroactive reinsurance covers losses from events that have already occurred before the contract's inception; these premiums follow a different accounting treatment (typically immediate recognition with a deferred gain mechanism, not a prepaid amortization approach). Option B (reinsured) is wrong because "reinsured" describes a party (the ceding company), not a contract type. Option C (obligatory) is wrong because obligatory vs. facultative describes how risks are bound (automatically vs. case-by-case), which is an entirely separate classification dimension from prospective vs. retroactive.

Memory tip: Think "pro-spective = pro-rated into the future." If the coverage looks forward, the premium is prepaid and spread forward too. Retroactive looks backward at past losses, so it gets backward-looking (immediate) accounting treatment.

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