Because premiums for a reinsurer typically are not fully earned when received, provision is made for recording premiums in which of the following stages of development?

Question

Options

• Areinsurance premiums, earned premiums, and unearned premiums
• Bwritten premiums, assuming premiums, and unearned premiums
• Crecorded premiums, revenue-generated premiums, and ceded premiums
• Dwritten premiums, earned premiums, and unearned premiums

• A
  6% (1)
• B
  13% (2)
• C
  6% (1)
• D
  75% (12)

Explanation

Option D is correct because reinsurance premium accounting tracks premiums through three natural stages: written premiums (premiums recorded when the policy is bound), earned premiums (the portion recognized as revenue over the policy period), and unearned premiums (the portion not yet earned, held as a liability reserve). Since reinsurance contracts often span long periods, premiums received upfront aren't fully earned immediately - hence the need to track all three stages.

Why the distractors fail:

• A uses "reinsurance premiums" as a stage, which is not a recognized accounting stage - it's a category of premium, not a development phase.
• B introduces "assuming premiums," which describes the reinsurer's role (assuming risk) rather than a premium development stage.
• C invents non-standard terms ("revenue-generated premiums," "ceded premiums") - ceded premiums specifically refer to the cedant's (primary insurer's) perspective of transferring risk, not a reinsurer's recording stage.

Memory tip: Think W-E-U ("We Earn Underwriting") - Written → Earned → Unearned. These three stages mirror how any insurance premium moves from contract inception through the policy period, and only D uses all three standard terms correctly.

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