How is earned premium defined?

The definition of earned premium is best understood as the amount that has been "used up" during the policy term. This reflects the portion of the premium that relates to the time period the insurance coverage has been in effect. As time passes, a portion of the premium becomes earned because the insurer has provided coverage for that duration.

In contrast, unearned premium refers to the portion of the premium that corresponds to the time remaining on the policy. Therefore, the earned premium can be seen as the value of the protection provided to the policyholder, acknowledging that risks have been covered during the policy term.

While the total premium on all policies written reflects the gross income of the insurance company, it does not indicate how much of that premium has been utilized. Similarly, the amount estimated for future losses pertains to reserves and is not related to the definition of earned premium. Thus, focusing on the coverage period and the actual use of the insurance helps clarify the concept of earned premium effectively.