Earned Premium

What is an ‘Earned Premium’

An earned premium is the amount of total premiums collected by an insurance company over a period that have been earned based on the ratio of the time passed on the policies to their effective life. This pro-rated amount of “paid in advance” premiums have been earned and now belong to the insurer.

Explaining ‘Earned Premium’

The premium that a policyholder pays for an insurance contract is not immediately recognized as earnings by the insurer. While the policyholder has met his or her obligation by paying for the policy and thus the benefits that he or she could receive, an insurer has only just begun its obligation when it receives the premium. When the premium is first received it is considered an unearned premium, and is not recognized as profit. As time passes, however, the insurer incrementally changes the status of the premium from “unearned” to “earned”. Until the policy end date is reached the insurer is responsible for any claims made, and only when that date is reached will the entirety of the premium be considered profit.

Further Reading