The earned premium is referred to the premium acquired by the insurance company for a portion of the policy that has already expired. It is the amount that the policyholder had paid for such portion when the policy was in effect but has expired after that.
Since the insurance company has to cover the risk within that time, it contemplates the relevant premium payments as unearned. After the expiry, it can record the premium as earned or in the form of a profit.
Commonly, an earned premium is used in the insurance industry. As policyholders pay their premiums in advance, insurers don’t consider the paid premiums immediately as the Earnings. While the policyholder meets the financial obligations and gets advantages, the obligation of an insurer starts when the premium is received.
When the policyholder pays the premium, it is regarded as the unearned premium and not as a profit. The reason behind this is because the insurance company still doesn’t have any obligation to fulfil.
The insurer has the entitlement to change the premium’s status from unearned to earned when the entire premium is regarded as profit. Now, suppose that the insurance company has recorded the premium as their earning and the time period has not forgotten.
However, the insured party can file the claim within this time period. The company will also have to reconcile the books to relax the transaction that lists the premium in the form of an earning.
There are two different methods to calculate the earned premiums. While one is known as the exposure method, the other one is the accounting method. The exposure method doesn’t consider the premium date when it was booked.
Talk to our investment specialist
On the contrary, it takes into consideration how the premium is exposed to losses over a certain time period. This one is quite a complex method as it comprises evaluating the unearned premium exposed to losses.
This method also comprises the evaluation of a variety of risky scenarios with the help of historical data that occurred within a period of time. On the other hand, the Accounting method is the one that is used commonly.
This method is used to show earned premium on the majority of corporate Income statements of the insurer. The calculation that is used in this method is about dividing the total premium with 365 and multiplying its result by the elapsed days.
For instance, suppose an insurer received Rs. 1000 premium on a specific policy that is in effect for 100 days. By calculating, the premium will be:
Rs. 1000 / 365 x 100 = Rs. 273.97.