Premiums earned in the insurance context refers to the portion of an insurance premium that has been ’earned’ by the insurer. This represents the coverage that has already been provided during a specified period of the policy term that has now elapsed.
Understanding Premiums Earned
- Time Proportionate: Premiums are generally earned by an insurer on a time proportionate basis - as time passes on a policy, more of the prepaid premium is earned. The non-earned portion constitutes advance payment for the upcoming period and can return to the policyholder if the policy is canceled.
Importance in Insurance Accounting
- Revenue Reporting: For insurance companies, earned premiums indicate how much of the collected premiums can legitimately be recorded as revenue on the financial statements since the obligation of coverage for that income has been met for that period.
Legal and Regulatory References
- In the context of compliance and reporting standards, guidelines and procedures are typically governed by bodies like the National Association of Insurance Commissioners (NAIC). Various state insurance codes also elaborate on how insurers should handle earned and unearned premiums. Reference can be made to specific state rules and the NAIC Annual Statement Instructions for insurance companies’ financial reporting.
Calculation
- Example: If a six-month policy is paid in advance with a premium of $600, by the end of the third month, half of this amount ($300) would be considered ’earned'.
Understanding how premiums are segmented between earned and unearned portions helps both insurers and insured personas track policy progress and understand their current financial liabilities and assets concerning ongoing insurance coverage.
