A policy’s premium is earned over time as coverage is provided. On a $12,000 annual policy, about $1,000 is earned each month. At the end of month three, $3,000 is earned and $9,000 is unearned. If the policy cancels then, the unearned premium is what’s refunded, less any short-rate penalty or minimum earned premium.
Written premium is the full premium on policies issued during a period, whether or not it has been earned yet. Carriers and agencies report both.
Why agencies care
Commission chargebacks. Commission is usually paid on written premium. When a policy cancels mid-term, the carrier takes back the commission on the returned premium. An agency that counted a big commission as revenue in January may give part of it back in June.
Contingent commissions. Many profit-sharing agreements measure loss ratio as incurred losses divided by earned premium. A fast-growing book has lots of unearned premium, which can make the loss ratio look worse early in the year. See contingent commission.
Audits. For auditable lines such as WC and GL, the final earned premium is set only after the premium audit compares actual payroll or sales with the estimates.
How it shows up in an agency
A client switches carriers mid-term. The CSR requests cancellation of the old policy, and the AMS shows the return premium and the commission chargeback. Agency accounting matches both when the carrier’s next commission statement arrives.
Common confusion
- Earned isn’t collected. Earned premium may still be unpaid if the client is on installments.
- Fully earned. Some fees and some E&S premiums are “fully earned” at inception and never refunded.
- Daily earning. Most carriers earn premium daily (pro rata), not monthly. The example uses months for simplicity.