Principles of Risk Management and Insurance 13th Edition by George Rejda,Michael McNamara

Exercise 3

Property Insurance Company is a new property insurer. The company is growing rapidly because of a new homeowners policy that combines traditional homeowner coverages with insurance that pays off the mortgage if the insured dies or becomes totally disabled. Premiums written have increased substantially; new agents have been hired; and the company is considering expanding into additional states. However, its growth has been hampered by statutory accounting rules that require an insurer to write off immediately its first-year acquisition expenses but do not allow full recognition of premium income until the policy period has expired. In this case, explain how reinsurance will enable Property Insurance to continue to grow in an orderly fashion.