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.

BREAKING DOWN '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.

There are two different methods for calculating earned premiums: the accounting method and the exposure method.

The accounting method is more commonly used, and is how earned premium is shown on the majority of insurers' corporate income statements. The calculation used in this method involves dividing the total premium by 365, and multiplying this by the number of days that have elapsed. For example, an insurer who receives a $1000 premium on a policy that has been in effect for 100 days would have an earned premium of $273.97 ($1,000 / 365 * 100).

The exposure method does not take into account the date that a premium was booked, and instead looks at how premiums were exposed to losses over a given period of time. It is the more complicated method, and involves examining the portion of unearned premium exposed to loss during the period being calculated. The exposure method involves the examination of different risk scenarios (using historical data) that may occur over a period of time – from high risk to low risk scenarios – and applies the resulting exposure to premiums earned.

RELATED TERMS
  1. Premium Balance

    The amount of premium that is owed to an insurer for a policy, ...
  2. Written Premium

    An accounting term in the insurance business used to describe ...
  3. Developed To Net Premiums Earned

    The ratio of developed premiums to net premiums earned over a ...
  4. Net Premiums Written

    The sum of premiums written by an insurance company over the ...
  5. Advance Premium Fund

    Insurance companies who receive advance premiums must account ...
  6. Unearned Premium

    The premium corresponding to the time period remaining on an ...
Related Articles
  1. Markets

    Explaining Premiums

    Premium has a few different meanings in the financial world.
  2. Personal Finance

    Permanent Life Policies: Whole Versus Universal

    Permanent life insurance combines lifetime insurance with savings to provide lifelong security. Premiums are quite high because they’re partially invested.
  3. Personal Finance

    Can Going to the Gym Lower My Insurance Premiums?

    Find out whether a gym membership and living a healthier lifestyle can lead to lower insurance premiums or other financial rewards.
  4. Personal Finance

    What's Universal Life Insurance?

    Universal life insurance is permanent life insurance that offers a savings element.
  5. Investing

    The Industry Handbook: The Insurance Industry

    As a result of globalization, deregulation and terrorist attacks, the insurance industry has gone through a tremendous transformation over the past decade. In the simplest terms, insurance of ...
  6. Personal Finance

    Explaining Insurance

    Insurance is a form of contract between an individual and an insurance company that spreads risk in exchange for premium payments.
  7. Retirement

    Life Insurance: Putting A Price On Peace Of Mind

    Would your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
  8. Personal Finance

    Intro To Insurance: Types Of Life Insurance

    By Cathy ParetoLife insurance protection comes in many forms, and not all policies are created equal, as you will soon discover. While the death benefit amounts may be the same, the costs, structure, ...
  9. Personal Finance

    Does Buying a Guaranteed Life Insurance Policy Make Sense?

    When does it make sense to buy a life insurance policy that is guaranteed?
  10. Personal Finance

    How Whole Life Insurance Works

    Whole life insurance combines insurance and an investment component for policyholders.
RELATED FAQS
  1. How do I calculate insurance premium tax?

    Find out how your health insurance premiums can affect your income taxes, including when you may be able to deduct premium ... Read Answer >>
  2. How does the combined ratio measure the financial health of insurance companies?

    Learn about the combined ratio, what the combined ratio measures and how it is used to measure the financial health of insurance ... Read Answer >>
  3. What is the expense ratio in the insurance industry?

    Learn about the expense ratio for insurance companies and the different methods of calculating it. The expense ratio is a ... Read Answer >>
  4. How can an investor determine a company's annual return from looking at its financial ...

    Understand what a share premium account is, what funds go into the account and the specific purposes for which the funds ... Read Answer >>
  5. How does a share premium account appear on a balance sheet?

    Learn where a share premium account shows up on a balance sheet and for what purposes funds in a share premium account may ... Read Answer >>
  6. What are the IRS regulations regarding a share premium account?

    Read about the tax treatment, or lack thereof, for a corporation's share premium account, also known as the additional paid-in ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center