Earned versus unearned premium
Insurance coverage usually extends over time. Premium attributable to elapsed coverage is generally treated as earned, while the portion attributable to future coverage is unearned, according to the insurer's accounting policies.
Example
A policyholder pays a $1,200 premium for 12 months of coverage. Under a simple straight-line illustration, after three months, $300 would be earned and $900 would remain unearned. Actual accounting depends on coverage, applicable rules, and policy terms.
Why it matters
- Unearned premium is not the same as unpaid premium.
- Cash collected is not necessarily earned revenue.
- Cancellations and refunds can affect unearned balances.
- Finance teams should not count the application of already received cash as new recovery.
The NAIC defines an unearned premium as premium paid for coverage not yet provided, while an unearned premium reserve reflects future coverage obligations on the balance sheet.
Read Insurance Receivables: The 2027 CFO Revenue Operations Guide.
Reference: NAIC Glossary of Insurance Terms