Definition
Earned premium refers to the portion of the insurance premium that an insurance company has ’earned’ for the coverage provided during the period of insurance that has already expired. Essentially, it’s the piece of cake that the insurer gets to keep after the policyholder has enjoyed their slice of coverage.
Earned Premium vs Unearned Premium Comparison
| Feature | Earned Premium | Unearned Premium |
|---|---|---|
| Definition | The portion of premium for coverage already enjoyed | Premium received for coverage not yet provided |
| Recognition | Recognized as revenue once coverage expires | Recorded as a liability until coverage is delivered |
| Impact on Profit | Increases profit when recognized | Decreases profit until earned |
| Financial Reporting | Reported on income statement as earned revenue | Reported on balance sheet as a liability |
Examples
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Monthly Insurance Policy: If an individual pays $120 for a 12-month auto insurance policy, after one month, the insurance company earns $10 of that premium. The remaining $110 is considered unearned.
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Quarterly Health Insurance: A family pays $600 for a 6-month health insurance plan. After the first month, the company earns $100, while the remaining $500 remains unearned until the month of coverage elapses.
Related Terms
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Premium: The price a policyholder pays for an insurance policy.
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Loss Ratio: A measure of losses paid out in claims divided by the premiums earned; it shows how efficiently an insurance company is running.
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Claims Reserve: The money that insurers set aside to pay future claims.
Formulas, Charts, and Diagrams
Calculating Earned Premium
graph TD;
A[Total Premium Received] --> B[Total Coverage Days]
A --> C[Days Covered];
C --> D[Earned Premium Calculation: (Total Premium / Total Coverage) * Days Covered]
Humorous Citations and Fun Facts
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“Insurance is like marriage. You pay, pay, pay, and you still end up getting hitched to worries!” – Anonymous
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Fun Fact: The concept of insurance dates back to ancient Babylon (around 2100 B.C.) when merchants started sharing risks. Apparently, they made a pretty good living… or at least a “policy” out of it! 📜
Frequently Asked Questions
Q: What happens to unearned premium when a policy is canceled?
A: If a policy is canceled, unearned premiums are typically refunded to the policyholder, like giving back a half-eaten sandwich!
Q: How do companies handle changes in premiums?
A: Adjustments can lead to increases or decreases in both earned and unearned premiums—welcome to the rollercoaster of finance!
Suggested Resources
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Books:
- Insurance for Dummies – A light-hearted but informative take on insurance concepts.
- Fundamentals of Risk and Insurance by Emmett J. Vaughan
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Online Resources:
- Investopedia – for definitions and insights into earned premiums and insurance terms.
- Insurance Information Institute – provides extensive information on insurance and risk management.
Test Your Knowledge: Earned Premium Quiz
Thank you for exploring the concept of Earned Premium with us! Remember, in insurance, it’s all about balancing risk and reward—like tightrope walking without the safety net! 🧗♂️ Keep learning and laughing!
