Earned Premium (Insurance) Explained
Earned premium refers to a portion of the amount paid to the insurer as a premium that the insurer has earned at a given point in time. Restated, an earned premium is the amount of money or part of insurance premium that was paid to insurer as part of insurance policy. As the period of coverage passes, a portion of the policy has been earned by the insurer, as it has provided coverage during that time period.
There are two methods which are uses to determine earned premium; accounting method and exposure method.
- Accounting Method – The accounting method divides the premium amount by 365, and multiplies it by the number of days passed. For instance, an insurance company which receives a $1,000 premium on an insurance policy that has been in effect for 100 days, an earned premium would be $273.97 ($1,000 / 365) * 100.
- Exposure Method – The exposure method does not consider the premium date. Instead. This method analyzes how the premiums were subject to loss over a specific period. The method is complex and involves measuring the unearned part of premium exposed to loss during the period being calculated. The exposure method analyses many risk factors (using historical data) that may happen over a given period of time.
References for Earned Premium