Earned premiums are the portion of insurance premium recognized as the insurer provides coverage during the reporting period. Written premium reflects business bound or written; earned premium reflects the passage of the insured coverage period.
A simplified relationship is:
Earned premiums = written premiums + beginning unearned premium - ending unearned premium
The exact accounting presentation can vary, and insurers may discuss gross, ceded, and net earned premium separately.
Why earned premium matters
Earned premium is the denominator for many property and casualty underwriting measures, including Loss Ratio and many presentations of Insurance Expense Ratio.
Because losses and underwriting expenses are evaluated against the coverage that has actually been earned, using written premium instead can distort profitability analysis.
Written versus earned premium
Suppose an insurer writes a $1,200 one-year policy on October 1.
The full $1,200 can contribute to written premium when the policy is written. If three months of coverage have elapsed by December 31, a simplified straight-line example would recognize about $300 as earned premium and leave about $900 unearned for future periods.
This is why Gross Written Premiums and Net Written Premiums can grow faster or slower than earned premium during periods of accelerating or decelerating underwriting volume.
Net earned premiums
Public insurers often emphasize net premiums earned, meaning premium earned after the effect of ceded reinsurance.
Do not assume gross and net earned premiums carry the same economics. Reinsurance changes both premium retained and the losses ultimately borne by the insurer.
Earned premium is not cash collected
Premium recognition and cash collection are separate questions. An insurer can receive cash before it earns the related premium, or recognize receivables depending on billing arrangements.
Earned premium therefore should not be treated as a cash-flow measure.
Investor interpretation
When earned premium changes, compare it with:
- prior written-premium growth;
- pricing and renewal disclosures;
- reinsurance changes;
- loss trends;
- underwriting expenses; and
- the Combined Ratio.
Strong earned-premium growth is not automatically favorable if loss severity, reserve development, or acquisition costs deteriorate faster.
Sources
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