What is Unearned Premium?
Unearned premium may refer to an insurance term that describes the portion of a policyholder's premium paid in advance for coverage that has not yet been used. When a policyholder pays the total premium for a policy in advance, the unearned premium becomes the amount of money owed to the policyholder if the policy is canceled before the policy period ends.
Unearned Premium in More Detail
An unearned premium is the opposite of earned premium, which is the amount of money that has been paid for coverage that has already been used. It’s also sometimes referred to as a return premium.
Unearned premium is essential in the insurance industry because it helps insurers manage their balance sheets. When a policyholder pays a premium in advance, the money is usually held in an escrow account until the policy period ends. At that point, the premium can be applied to the policyholder’s account, or the unearned portion can be returned to the policyholder.
Unearned premium is also used to calculate an insurer’s loss ratio, which measures the insurer’s profitability. The loss ratio is calculated by dividing the insurer’s total claims paid out by its total premiums earned. The insurer can calculate its loss ratio more accurately by subtracting the unearned premium from the total premiums earned.
In summary, an unearned premium is an insurance term that refers to the portion of a policyholder’s premium that has been paid in advance for coverage that has not yet been used. It is an essential concept in the insurance industry because it helps insurers manage their balance sheets and calculate their loss ratios.
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