What is earned premium?

Earned premium refers specifically to the portion of the premium that has been "earned" by the insurer for the coverage provided during a specific period, typically calculated based on the actual days of coverage that have taken place. For example, if a policyholder pays for a one-year policy but cancels it after six months, the insurer has earned the premium for those six months of coverage. This concept is crucial for understanding how insurers account for income and liabilities, particularly in scenarios of cancellation or policy renewal. It underscores the idea that premiums are not fully earned at the time of payment; rather, they must align with the time that the coverage is actually in force.

The other options reflect different aspects of insurance premiums but do not accurately define earned premium. The total premium paid for the entire policy term represents the gross income to the insurer but does not account for time spent providing coverage. The remaining amount of premium refunded upon cancellation relates to unearned premium, which is the portion of the premium corresponding to the unused coverage time. Lastly, the initial payment made when the policy was issued does not convey the concept of earned premium, as it merely represents the upfront cost rather than an allocation of coverage over time.