Earned Premium

AAA

DEFINITION of 'Earned Premium'

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.

INVESTOPEDIA EXPLAINS 'Earned Premium'

For example, if a $1,000 policy has a two-year life span and no claim has been filed six months into the policy, the company will have an earned premium amount of $250.

There are two different methods for calculating earned premiums, an accounting method and an exposure method. The accounting method is highlighted above and is the more prevalent of the two; the accounting method is also how earned premium is shown on the majority of insurers' corporate income statements. Under the exposure method, earned premiums are calculated based on the percentage of total premium that was exposed to loss during the period being calculated and does not take when the premium was actually collected into account .

RELATED TERMS
  1. Float

    Money in the banking system that is briefly counted twice due ...
  2. Premium Income

    1. In investing, income that is earned through the sale of an ...
  3. Advance Premium

    The initial premium paid to bind an insurance policy for a given ...
  4. Advance Premium Fund

    Insurance companies who receive advance premiums must account ...
  5. Accommodation Line

    An addition or change to a standard insurance contract. The change ...
  6. Accounting Method

    The method by which income and expenses are reported for taxation ...
Related Articles
  1. Understanding Your Insurance Contract
    Insurance

    Understanding Your Insurance Contract

  2. Exploring Advanced Insurance Contract ...
    Home & Auto

    Exploring Advanced Insurance Contract ...

  3. Understanding The Income Statement
    Forex Education

    Understanding The Income Statement

  4. How do you calculate retained earnings ...
    Fundamental Analysis

    How do you calculate retained earnings ...

Hot Definitions
  1. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  2. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  3. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center