What is Earned Premium?
Earned premium is the amount of money an insurance company has “earned” over a certain period, corresponding to the coverage it has already provided. When an insurance policy is issued, the policyholder pays a premium upfront for a specific coverage period. However, the insurer doesn’t immediately consider the whole premium as revenue; instead, it is recognized gradually over the policy term as coverage is provided.
For example, if a policyholder pays for a 12-month policy, the insurance company will recognize a portion of that premium earned each month as time passes and coverage is given. The remainder of the premium is called “unearned premium” until the coverage period ends.
Earned premiums are crucial for understanding an insurance company’s financial health. It helps to differentiate between the premiums collected but not yet earned and those considered income because they correspond to coverage already provided. Insurers rely on earned premiums to assess their performance and profitability over time.