Earned premium is the portion of a policy’s premium that corresponds to the part of the coverage period that has already passed. In plain language, it is the part of the premium the insurer has already earned because it has already carried the risk for that portion of the policy term.
How earned premium works
Insurance premium is usually collected up front for a future coverage period. As time passes, the insurer converts part of that amount from unearned premium to earned premium. That matters because the insurer has already provided the coverage for that elapsed period.
The calculation often depends on:
- the policy effective date
- the policy period
- any cancellations or endorsements that change premium
- whether the return is pro rata or short rate
Why it matters in real insurance operations
Earned premium affects both accounting and claims administration. Insurers use it to measure revenue for the time they have actually been on risk. It also matters when a policy is canceled midterm, because the insurer normally keeps only the earned portion and returns the rest, subject to the contract’s cancellation rules.
Underwriters and finance teams track earned premium when comparing premium to incurred losses and when evaluating whether a book of business is performing as expected.
Practical example
Suppose a one-year policy with a $1,200 annual premium has been in force for six months. If no special adjustments apply, roughly half of the premium has become earned because the insurer has already carried the risk for half of the policy period.