What does "earned premium" refer to in the insurance industry?

Earned premium in the insurance industry refers to the portion of the premium that corresponds to the amount of coverage that has been provided to the policyholder over a specific period. It is essentially the income that an insurer recognizes as having been "earned" through providing insurance coverage.

When a policy is active, the insurance company earns premium revenue as the coverage period progresses. For example, if a one-year policy has been in effect for six months, half of the total premium is considered earned because the insurer has provided that amount of coverage during that time.

In contrast, the total amount a policyholder pays encompasses the full premium due, regardless of how much has actually been earned based on the coverage period. This differs from the concept of commissions or the financial aspects tied to claims and cancellations. Hence, the understanding of earned premium is crucial for evaluating the insurer's revenue versus its liabilities and provides insight into the insurance operations’ financial health.