An insurance operation begins with initial surplus of 2,000. The insurer issues

Question

An insurance operation begins with initial surplus of 2,000. The insurer issues fully discrete 2-year term insurance policies to 10 lives. The death benefit is 400, and the annual premium is 74.33. There is one death in each policy year, and investment income is at 10%. At the end of the first policy year the insurer’s balance sheet carries a reserve liability of 16.58 for each surviving policyholder. The insurer does not charge any expenses against its income. Prepare an income statement and a balance sheet for each policy year. (Ans: The net income for the first year is 468.41, and the balance sheet surplus at the end of the first year is 2,468.41. The net income for the second year is 746.85, and the balance sheet surplus at the end of the second year is 3,215.26.)

Explanation / Answer

INCOME STATEMENT YEAR1

BALNCE SHEET

2000

INCOEM STATEMENT YEAR2

Surplus in balance sheet => 746.85 + 2468.41 => $ 3215.26

INCOME AMOUNT EXPENDITURE AMOUNT PREMIUM (74.33 *10) 743.3 DEATH EXPENSE 400 INVESTMENT INCOME (2000+743.3)*10% 274.33 RESERVE(16.58*9) 149.22 NET INCOME $468.41

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