Under which method of calculating unearned premium reserves, the amortization procedure uses the written premiums for the full term of the policy, or for any additional premium paid.

Question

Options

• ADirect
• BIndirect
• CIn-force
• DEffective data-recovery

• A
  82% (14)
• B
  6% (1)
• C
  12% (2)

Explanation

Option A (Direct) is correct because, under the direct method, unearned premium reserves are calculated by amortizing the full written premium over the policy term - the insurer starts with the total premium written and reduces it (earns it) proportionally as time passes, including any mid-term additional premiums in full.

Option B (Indirect) is wrong because the indirect method derives the unearned premium reserve by subtracting earned premiums from written premiums rather than amortizing the full written premium directly - it works backward from earnings, not forward from the written amount.

Option C (In-force) is a distractor that sounds plausible (active policies do generate UPR), but "in-force" describes a policy status, not a named reserve calculation method.

Option D (Effective data-recovery) is entirely fabricated jargon with no meaning in insurance reserving - a classic nonsense distractor designed to catch guessers.

Memory tip: Think "Direct = top-down." The direct method starts at the top with the full written premium and amortizes down to zero by policy expiration - you're going straight from the source number.

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