What is the definition of Earned Premium?
Earned Premium is the portion of the insurance premium that applies to the period that already has been covered. Even if the insurance premium is paid by the policyholder often at the beginning of the policy, it is only the portion of the risk that has already elapsed of expired that is earned by the company.
For example, Jim has a home insurance policy, where he pays annual premiums of $1,200. After six months that the coverage is in place, the insurance company has earned half of the premium paid ($600).
In accounting for the income and profit of the insurance company, only the earned premium is included. This is because it is assumed that the company did not need to pay premiums on that portion of the coverage. If the company had paid benefits or claims for that period, then that part of the premium may be listed as a loss.
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