Unearned Premium Definition & Meaning | Insurance Term | CSIMarket
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Glossary

Unearned Premium

Insurance Term

Unearned premium refers to the portion of an insurance premium that has been paid in advance but has not yet been earned by the insurer. It is an amount that the insurer owes to the policyholder in the event that the policy is cancelled or terminated before the end of the policy term.

Unearned premium is used as a liability on the financial statements of insurance companies. It is important for insurers to keep track of unearned premiums as they impact their financial position and profitability.

To calculate unearned premium, insurers use a pro-rata method. This involves dividing the total premium by the number of days in the policy term, and then multiplying that amount by the number of days that remain in the current policy term.

For example, if a policy has a total premium of $1,200 for a 12-month term, the insurer would divide $1,200 by 365 days to get a daily rate of $3.29. If the policy has been in effect for three months, the insurer would then multiply $3.29 by 273 days (365 – 92) to get an unearned premium of $897.17.

Unearned premium is an important calculation for insurers as it impacts their profitability and financial stability. By accurately calculating unearned premiums and maintaining proper reserves, insurers can ensure they have the financial resources to pay out claims and maintain their operations.


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