Definition Earned premium

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Earned premium

An earned premium is a term which is used by insurance companies to define which portion of premiums colleted over a period of time that the insurance companies can claim as "earned".

For example: if a $5000 policy has a 5 year life span and no claim have been made for 2 years than the insurance company will have an earned premium of $2000.

There are two popular methods used by insurance companies to calculate their earned premium.

1) The accounting method as described in the above example. This is the more popular of the two calculations.

2) The second method is called the exposure method in which earned premiums are based on the portion of the total premiums over a specified time period that were exposed to loss. This form of calculation does not take into account when the premiums were collected.

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