Which method assumes that premiums are written evenly through each month?

• A. Daily pro rata method
• B. Monthly pro rata method
• C. Annual pro rata method
• D. Level premium method

Answer: (B)

When recognizing earned premium over a policy term, you choose a time unit to spread the premium. If you assume the premium is earned evenly each month, you’re using the monthly pro rata approach. This means the premium is divided into equal monthly portions, so for a policy with a yearly premium, you’d record an equal amount as earned in each calendar month (and prorate for any partial month if needed). This matched monthly pattern reflects steady exposure and revenue flow over time.

Daily pro rata would distribute earnings by days, which is more granular. Annual pro rata spreads earnings over whole years, not months. Level premium refers to the premium amount being constant over time, which describes the payment pattern rather than how earnings are allocated across months.