What is Earned Premium?
The term earned premium refers to the amount that an insurance company has received for the portion of an expiring policy. It is what the insured party pays for a portion of the time that the insurance policy was in place, but has expired since.
Since the insurance company covers the liability during that period, the subsequent premium fees it receives from the insured party are known as unearned. After the time has expired, it can then report it either as earned or as profit.
How to Calculate Earned Premium?
The earned premium can be calculated in two ways - the accounting method and the exposure method.
The Accounting Method
This is the most commonly used method for calculating the earned premium. This method is used to indicate earned premium on most of the insurers' corporate income statements.
The Exposure Method
The exposure method will not consider the date on which a premium is reserved. As an alternative, it considers how premiums are exposed to losses over a set period of time. It is a complex method and comprises inspecting the portion of the unearned premium exposed to loss during the period of calculation.
The exposure method will include the inspection of various risk scenarios via historical data that might occur over a time frame, between high-risk and low-risk scenarios, and applies the resulting exposure to the earned premiums.
Earned Versus Unearned Premiums
Earned premiums refer to any premium that is paid in advance and belongs to an insurer. Unearned premiums are collated in advance by insurance firms that are required to provide them back to insurance policyholders if coverage is terminated before the premium period is over.
