Question

On June 15, 2017, the city acquired and paid for an insurance policy that cost 300,000. The policy covers the two-year period beginning July 1st. What is the cost of the insurance policy?

1) 300,000
2) 12,500
3) 150,000
4) 600,000

Answer 1

The insurance policy acquired by the city on June 15, 2017, costs 300,000 for a two-year period. This reflects the total paid premium. The example given explains how premiums are set based on total anticipated accident costs.

Step-by-step explanation:

The cost of the insurance policy acquired by the city on June 15, 2017, which covers a two-year period beginning July 1st, is 300,000. This cost is indicative of the total premium paid for the entire duration of the policy. Insurance costs are typically considered as a prepaid expense and are expensed over the period of coverage. As for the example provided where each of the 100 drivers pays a premium of $1,860 annually, the insurance company will collect $186,000, which is needed to cover the costs of the accidents that occur. This example illustrates how insurance premiums are calculated based on the risk assessment and total costs incurred from claims.