What does "earned premium" refer to in insurance?

Earned premium refers to the portion of the insurance premium that corresponds to the amount of coverage that has been provided by the insurer during a specific period. This concept is crucial in determining revenue for insurance companies, as it allows them to recognize income as the insurance coverage is utilized over time.

When a policyholder pays their premium upfront, that payment covers a specific term of insurance. As time passes and the insurer provides coverage, these premiums are considered "earned." For example, if a policyholder pays an annual premium, a portion is considered earned as the days pass within that policy year. If the policy is later canceled, the portion of the premium that has not yet been used for coverage becomes unearned premium. However, the earned premium reflects the risk the insurer has absorbed during the time the policy has been active.

The other options do not accurately reflect the definition of earned premium. The total premium paid by the policyholder encompasses both earned and unearned premiums. The sum paid in claims does not pertain to premium earnings, and the amount refunded to policyholders relates to unearned premium rather than earned premium. Thus, understanding the concept of earned premium is critical for insurance brokers when discussing coverage and financials with clients.