Earned Premium

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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 .

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