Insurance companies are still considered a financial business institution which means that these companies also profit from the amount of premium the insured is paying. To determine that insurance company’s profit is through its premium earned or earned premium.
Premium earned is described as the profit of the insurer indicated as the portion of the written premium based in the specified time the insurance take in effect and during the time when the insurer has been paying for the loss under the term and conditions of the insurance policy one has. While the insured is paying for the premium, the insurance company will earn a premium on which the company will expose itself on the possible risk on behalf of the policyholder.
Take for instance, a one year policy required to have a full payment of the premium right in the beginning of the policy has been taken into effect for 120 days, the 120 days of the year will be considered as the earned premium. If in case the insured will cancel his insurance policy, the earned premiums will never e given back to the policyholder.
To check how earned premium works, take a look at the span of the policy and what certain amount of time is elapsed. Take for instance, if the policyholder had already paid his premium for a specific time of two year of life auto insurance and 12 months have already passed by the insurance company had subsequently earned the half of the premium already since the contract signed is almost halfway over. Just like if an insured paid already his premium for a year of home insurance and 3 months have already passed by, this will automatically mean that the insurance company have already earned the quarter of the earned premium.
The earned premium explains that the insurer doesn’t have to pay up front in the policy. If in case the insurance policy had paid, this may be considered as a loss because the expense of the premium rarely is high enough to immediately cover any claims. This is the reason why insurance companies are meticulous in computing for the potential losses since they want to make sure that there is balance to its risks. The basic goal of this is to lessen the payouts and keep profits as high as possible. This can be done in many ways such as scrutinizing all the claims meticulously to look if the claims can be denied due to technicality and through underwriting of low risk policies.
When the time comes that the insurer will render the policy statement of the account to the insured, the company is obliged to disclose matters when it comes to earned premium. It is of best idea to assess and confirm that your own records follow the standards of the insurance company. Take for instance, if somebody bought a home insurance by February ad received her account statement by July which also laid that the insurance company has earned from the premium, this is going to be a big discussion as with standing problem. Companies in the insurance company should be very careful in matters like this.