Question 1

i)

Debit Credit
Cash A/C 6200
Advance contribution from 6200
participants

ii)

Debit Credit
Cash A/C 4500
Contribution receivable from 4500
participants

iii)

Debit Credit
Cash A/C 5500
Contribution renewal 5500
receivable from participants
Question 2:

Guaranty fund is a law which is formulated in each and every state of the country. there might be

a case where the insurer is unable to meet their financial obligations. Hence, the policyholder

remains unprotected. In order to protect the policyholder from the risk of insurer not being able

to pay insurance amount, the state’s insurance commission sets up a guaranty fund. It also has

the function of evaluating an insurance company's licence to offer insurance services in the state

and to reimburse the amount due to the policyholder but only up to the limit set by them

(Guaranty fund). There are three primary methods used by Guaranty fund to assess property and

liability insurance:

Administrative assessment: a fixed amount is paid by the company to the guaranty fund. This

amount is used in the operations of the guaranty fund so that it may solve the problem of

defaultation when it occurs and pay the amount to the policyholder in order to protect him.

Loss based assesments: assesments are based on either the company that incurs the loss or on the

amount of loss that can be incurred by all companies which are influenced by the authority of

guaranty fund. To predict defaultation of a company, they can use that company’s risk to predict

it.

Premium based assesments: the insurance company gives a premium to the insurer in case it

exceeds the losses. In this type of assessment, the written premium of a corporation is assessed.

For the assessment, base year can either be the current year or the year before the assessment

takes place.

All these methods can be used by a state guaranty fund in order to assess property and liability

insurance.
Question 3:

Return on Assets= Total profit/ Total Assets

In this case, we take average of assets of year 2014 and 2015

Average assets= (1,390,000 + 1,517,500) / 2 = 1,453,500

Total profit= 377,500

Return on Assets = 377,500 / 1,453,500 = 0.2597 or 25.97%

Quick liquidity = Quick asset/ Quick liability = current assets / current liabilities

Current assets= Cash + short term investment= 11,500+ 23,500= 35000

Current liabilities= short term liability= 85000

Quick liquidity = 35000 / 85000 = 0.41x or 0.41 times

Surplus distribution ratio= surplus distributed to participants / Total profit

surplus distributed to participants = 145,500

Total profit = 377,500

Surplus distribution ratio= 145,500 / 377,500 = 0.3854 or 38.54%

Expense Ratio = Total expense / Net assets (2015)

Total expenses = Wakalah fee + commission paid + Management expense =

77,500+28,300+58,000 = 163800

Net assets (2015) = 1,517,500

Expense Ratio = 163800 / 1,517,500 = 0.108 or 10.8%

Claims Ratio = Net claim incurred / Contribution earned = 287,500 / 632,500 = 0.4545 or
45.45%