Earned Premium Calculator
In the world of insurance, accurately tracking revenue and liabilities over the term of a policy is essential for both insurance providers and financial analysts. One of the most fundamental metrics in this space is the earned premium — the portion of an insurance premium that applies to the expired part of a policy term. Understanding and calculating earned premium helps insurers gauge financial performance, while policyholders can use it to evaluate how much of their payment has been “used.”
The Earned Premium Calculator simplifies this process by offering a fast, reliable way to determine earned premiums based on time elapsed and the total written premium. This tool is essential for any insurance company, actuary, or financial manager involved in underwriting or accounting.
Formula
The formula to calculate earned premium is:
Earned Premium = (Written Premium × Time Elapsed) ÷ Total Policy Term
This calculation assumes the premium is earned evenly over the policy term. For example, if a 12-month policy has been in effect for 6 months, then 50% of the premium is considered earned.
How to Use
To use the Earned Premium Calculator, simply input three key values:
- Total Written Premium: The full premium amount for the policy term.
- Policy Term (in months): The total duration of the policy.
- Time Elapsed (in months): The time since the policy started.
Once you input these values, click the “Calculate” button. The calculator will return the earned premium — the portion of the premium that corresponds to the elapsed time.
This information is crucial for insurance accounting, policy cancellations, and refund calculations.
Example
Let’s walk through a sample calculation:
- Written Premium: $1,200
- Policy Term: 12 months
- Time Elapsed: 4 months
Using the formula:
Earned Premium = (1,200 × 4) ÷ 12 = $400
So, $400 of the premium has been earned so far. If the policy were to be canceled at this point, only the unearned premium ($800) would be eligible for a refund, assuming a pro-rata cancellation basis.
FAQs
1. What is an earned premium?
It’s the portion of a policy’s total premium that corresponds to the elapsed time of coverage provided.
2. Why is earned premium important?
It reflects how much revenue the insurer has “earned” by providing coverage over a certain period.
3. How is it different from written premium?
Written premium is the total amount billed, while earned premium represents the part that covers expired policy time.
4. Can earned premium be higher than written premium?
No. Earned premium cannot exceed written premium.
5. What happens if the policy is canceled early?
Only the earned premium is retained; the unearned portion is usually refunded.
6. How do insurers use this metric?
They use it to report revenue accurately, assess liability, and calculate reserves.
7. Is earned premium calculated daily or monthly?
It can be calculated using daily or monthly pro-rata methods, depending on policy terms and insurer practices.
8. Does earned premium apply to all types of insurance?
Yes, it applies to most time-based policies including auto, home, and commercial insurance.
9. Can the earned premium be negative?
No, unless there is a refund or adjustment error.
10. What is unearned premium?
It’s the portion of premium covering the remaining (unexpired) policy period.
11. Is earned premium used in financial reporting?
Yes, it’s a key line item in insurance income statements.
12. How do I calculate earned premium for mid-term policy changes?
You may need to prorate based on days or adjust based on the effective change date.
13. What if I enter more elapsed time than the policy term?
The calculator assumes full premium is earned if time elapsed exceeds the policy term.
14. Are taxes included in earned premium?
Typically, taxes are excluded; only the actual insurance premium is considered.
15. Can brokers use this calculator?
Yes, it’s useful for brokers when explaining refunds or adjustments to clients.
16. How do refunds relate to earned premium?
Refunds are usually based on the unearned portion of the premium.
17. Is this calculator applicable for short-term policies?
Yes, it works for any term — whether 1 month or 36 months.
18. Can this be integrated into an insurance portal?
Yes, the code is simple enough for integration into most platforms.
19. What if the policy has non-linear earning patterns?
Then this calculator wouldn’t be accurate. Use actuarial methods in such cases.
20. Is this calculator useful for reinsurance?
It can provide a base-level calculation, but reinsurance often involves more complex modeling.
Conclusion
The Earned Premium Calculator is an essential financial tool for both insurers and policyholders. It simplifies a fundamental insurance accounting task, offering clarity on how much premium has been “used” at any point during a policy term. This understanding is crucial not just for transparency and compliance, but also for trust-building between insurers and their clients.
By breaking down complex calculations into an intuitive interface, this tool ensures better accuracy in reporting, seamless policy adjustments, and smarter financial decisions. Whether you’re handling insurance accounting or just trying to understand your own policy better, the Earned Premium Calculator is your go-to resource for precision and clarity.