Earned Premium
Candlefocus EditorEarned premium is the portion of a policyholder's total premium that has already been paid to the insurance company. The remaining unearned premium is the portion of the premium that is yet to be collected.
There are several methods of calculating the earned premium. The most commonly used method is the proportional rule. Under this method, the earned premium will be calculated by comparing the length of time since the policy was purchased to the total length of the policy's term.
For example, if an insurance policy has a duration of one year, and it has been held for three months, then the earned premium would be calculated by taking the three months that have passed divided by the full year of coverage, which would equate to 25 percent. This means that 25 percent of the total premium has been earned and the remaining 75 percent is still outstanding.
Another method of calculating the earned premium is to use the earned versus unearned premium ratio. Under this method, the earned premium is the total paid premium divided by the total expected premium. If the policyholder has made five payments on a policy that is expected to have an annual premium of $1,000, then the earned premium would be $500 divided by $1,000, or 50 percent.
The earned premium figure is an important indicator for insurers when evaluating their risk exposure as it provides an indication of how well their policies are performing. Insurers use these figures to assess their potential for potential future losses and to adjust premium rates accordingly.
It is also a common practice for insurers to use the earned premium data to assess the effectiveness of their insurance offerings and the corresponding customer experience. By monitoring the earned premium over time, insurers can determine the specific drivers that increase customer satisfaction and decrease customer attrition.
Earned premium is an important financial metric for insurers. It helps them assess the profitability of their policies and enables them to adjust their rates accordingly. It is also useful in evaluating the customer's experience and in understanding the drivers of customer satisfaction.