Earned Premium refers to the portion of an insurance policy’s premium that has been used to actually provide coverage up to a specific point in time. It represents the income that an insurance company has officially earned by providing insurance protection. This concept is crucial because insurance premiums are typically paid in advance, and the coverage is provided over a period of time.
The earned premium is calculated by taking the total premium and allocating it over the term of the policy. For example, if a policyholder pays an annual premium at the beginning of the policy period, the insurance company gradually earns the premium over the subsequent 12 months. As each day passes, more of the unearned premium becomes earned. This is an important measure for an insurance company as it helps in determining the company’s actual revenue from premiums during a financial period. It also plays a key role in the assessment of the company’s profitability, financial health, and in the calculation of various other financial ratios and figures that are important for both the company’s management and regulatory bodies.