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'

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. Paid-Up Additional Insurance

    Additional whole life insurance that a policyholder purchases ...
  3. Net Premiums Written

    The sum of premiums written by an insurance company over the ...
  4. Direct Premiums Written

    Total premiums received before taking into account reinsurance ...
  5. Unearned Premium

    The premium corresponding to the time period remaining on an ...
  6. Premium Income

    1. In investing, income that is earned through the sale of an ...
RELATED FAQS
  1. How does the combined ratio measure the financial health of insurance companies?

    The combined ratio measures the profitability of an insurance company by examining its earned premium from its policyholders ... Read Full Answer >>
  2. When is market to market accounting performed?

    Mark to market accounting is used for substantially all investments or financial instruments held on a corporation's balance ... Read Full Answer >>
  3. What types of assets may be considered off balance sheet (OBS)?

    Though the off-balance-sheet accounting method can be used in a number of scenarios, this accounting practice is especially ... Read Full Answer >>
  4. How is abatement cost accounted for on financial statements?

    Abatement costs are accounted for on a company's financial statements through increases in either cost of goods sold or operational ... Read Full Answer >>
  5. What is prime cost in managerial accounting?

    In managerial accounting, prime cost is the sum of direct costs needed to make a product and includes direct materials, direct ... Read Full Answer >>
  6. What is the difference between shareholder equity and net tangible assets?

    Shareholders' equity and net tangible assets are listed in a company's balance sheet and respectively express the company's ... Read Full Answer >>
Related Articles
  1. Insurance

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own.
  2. Home & Auto

    How An Insurance Company Determines Your Premiums

    Find out how insurers use credit history to build an insurance score and how it could affect your bottom line.
  3. Home & Auto

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
  4. Home & Auto

    The History Of Insurance In America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  5. Home & Auto

    5 Insurance Policies Everyone Should Have

    Insurance policies come in a wide variety of shapes and sizes. Shop carefully and the right policies will go a long way towards helping you protect your assets.
  6. Insurance

    Insurance for Millennials

    Four insurance must-haves – and one maybe – for Generation Y
  7. Fundamental Analysis

    How To Value An Insurance Company

    In the insurance space, accurate predictions of metrics such as ROE are important, and paying a low P/B can help put the odds in investors' favor.
  8. Insurance

    Selecting And Managing Insurance Payouts

    Find out which settlement option is right for you before you recieve your funds.
  9. Home & Auto

    Selecting The Right Mix Of Insurance Benefits

    Choosing employee benefits involves weighing the probability you will need them against taxes and cost.
  10. Retirement

    What To Do If Your Insurance Won't Pay

    Before paying for coverage, find out what you need to do to ensure you get paid.

You May Also Like

Hot Definitions
  1. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  2. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  3. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  4. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  5. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!