Earned Premium

What Is an Earned Premium?

The term earned premium alludes to the premium collected by a insurance company for the portion of a policy that has expired. It is what the insured party has paid for a portion of time wherein the insurance policy was in effect, however has since expired. Since the insurance company covers the risk during that time, it considers the associated premium payments it takes from the insured party as unearned. When the time has expired, it can then record it as earned or as a profit.

Understanding Earned Premiums

An earned insurance premium is generally utilized in the insurance industry. Since policyholders pay premiums in advance, insurers don't quickly consider premiums paid for an insurance contract as earnings. While the policyholder meets their financial obligation and gets the benefits, an insurer's obligation starts when it gets the premium.

At the point when the premium is paid, it is viewed as an unearned premium — not a profit. That is on the grounds that, as referenced over, the insurance company actually has an obligation to satisfy. The insurer can change the situation with the premium from unearned to earned just when the whole premium is viewed as profit.

The earned premium for a full year policy, paid front and center and in effect for 90 days, would be for those 90 days.

Say the insurance company records the premium as an earning, and the time span hasn't elapsed. In any case, the insured party records a claim during that time span. The insurance company should reconcile its books to unwind the transaction listing the premium as an earning. So it checks out to hold off on recording it as an earning if a claim is documented.

Special Considerations

There are two distinct ways of working out earned premiums: The accounting method and the exposure method.

The accounting method is the most generally utilized. This method is the one used to show earned premium on the majority of insurers' corporate income statements. The calculation utilized in this method includes isolating the total premium by 365 and duplicating the outcome by the number of elapsed days. For instance, an insurer who gets a $1,000 premium on a policy that has been in effect for 100 days would have an earned premium of $273.97 ($1,000 \u00f7 365 x 100).

The exposure method doesn't consider the date a premium is reserved. All things considered, it takes a gander at how premiums are presented to losses over a given period of time. It is a muddled method and includes looking at the portion of unearned premium presented to loss during the period being calculated. The exposure method implies the examination of various risk situations utilizing historical data that might happen throughout some stretch of time — from high-risk to okay situations — and applies the subsequent exposure to premiums earned.

Earned versus Unearned Premiums

While earned premiums alludes to any premiums paid in advance that are earned and have a place with the insurer, unearned premiums are unique. These are premiums collected in advance by insurance companies who are required to give them back to policyholders on the off chance that coverage is terminated before the period covered by the premium is finished.

Say, for instance, you take out an automobile insurance policy and prepay for a six-month term. On the off chance that you get into a fender bender and total your vehicle in the second month of the policy, the insurance company keeps the premiums paid for the initial two months. These are the company's earned premiums. In any case, the excess four months' worth of premiums are returned to the insured party. Since they are unused, they are called unearned premiums. Essentially, on the off chance that a policyholder pays $200 each month for a year insurance policy and chooses to terminate coverage following three months, the insurance company keeps $600 as earned premiums and refunds $1,800 to the policyholder as unearned premiums.

Features

• Earned premiums can be calculated by utilizing the accounting method and the exposure method.
• Insurance companies can record earned premiums as revenue after the premium's coverage period terminates.
• An earned premium is the premium utilized for the time span in which the insurance policy was in effect.