The only reinsurance companies that SIC deals with have proven themselves to be both reliable and financially sound. Many of the risks SIC insures are transferred to Rainy Reinsurance Corp. (RRC), a major reinsurance carrier, because of its fine reputation for handling policyholder claims quickly and fairly. In the many years it has been in the business, RRC has never defaulted on a policy transferred to it from SIC or any other company.

SIC has written two fire insurance policies, one for Chip and the other for Dale. The policies are virtually identical, both being for 3-year terms with face amounts of $3,000,000, and the policyholders are in the same risk class. In return for a favourable premium discount ($7,000 on each policy), Chip andDale both have agreed to the following conditions:

1. The policies are noncancellable by either party.

2. The policies may be transferred without recourse to any one of five listed

reinsurance companies (of which RRC is one).

3. The entire three-year premium must be paid in advance.

After the $7,000 discount, each policy has a premium of $50,000. Sales commissions are 10 percent of the premium, and policy-writing costs (including direct inspection and policy issue costs) amount to $1,000 per policy. SIC expects the claims that will be paid under policies in this group to total about 70 percent of the total premiums collected.

RRC will accept either or both of the policies for the standard industry fee of 80 percent of the original policy premium. However, SIC decided to transfer only one and keep the other. Because it was indifferent about which to retain, SIC arbitrarily kept the Chip policy and transferred the Dale one.

REQUIRED:

What income should SIC recognize on the Chip and Dale policies?