Earned premium
Earned premium is the part of an insurance premium that pays for coverage already provided during the expired portion of the policy term. The rest is unearned premium. If a policy ends early, the insurer may refund the unearned part, but the policy, filed rate, cancellation method, minimum premium, audits and state law can change the amount.
Also called: unearned premium
Earned premium matters most when a policy ends before its term is up. The part already earned pays for the time you were covered, and the unearned part is what a refund or credit is figured from when you cancel, switch insurers or close a business. How much of that unearned part comes back depends on the cancellation method in your policy, any minimum-premium clause, audits and state rules. It has nothing to do with what a claim pays.
How earned premium is calculated
The basic method is time. At any point in the policy period, earned premium is the pro rata share of written premium for the time the policy has already been in force, according to the NAIC Statistical Handbook (opens in a new tab). The NAIC auto insurance database (opens in a new tab) uses a six-month auto policy on two cars that costs $600, takes effect October 1 and is canceled effective January 31.
Hover or tap a row to highlight it.
| Item | Amount |
|---|---|
| Written premium for the term | $600 |
| Months of coverage provided (October 1 to January 31) | 4 of 6 |
| Earned premium ($600 x 4/6) | $400 |
| Unearned premium ($600 x 2/6) | $200 |
If the policy allows a pro rata refund and no other charge applies, the $200 is what is left for a refund or credit. Paying in installments does not change the coverage period used in the calculation. The $600 figure is an example, not an average premium.
Before a policy expires, written premium equals earned plus unearned premium, subject to endorsements, audits, return premiums and fees. At expiration, the full premium is generally earned.
Cancellation methods that change your refund
The method in your policy decides how close the refund comes to the unused time. Pro rata earns premium in proportion to time covered, either by exact days or by months; NAIC reporting guidance recognizes both daily and monthly proration, according to its data definitions (opens in a new tab).
Short rate applies when you ask to cancel and lets the insurer keep more than the time-based amount as an administrative charge. The return under short rate is generally about 90% of the pro rata return premium, though the insurer may use its own filed schedule, according to the California Department of Insurance glossary (opens in a new tab).
A minimum earned premium clause lets the insurer keep a stated amount or percentage even if the policy ends early, so the refund can be smaller than simple proration would give. Business policies rated on payroll, sales or mileage add one more step: an audit can produce additional or return premium after the fact. None of these methods changes your coverage limits; they change only how much premium comes back.
Where you run into earned premium
The term shows up mostly in property and casualty insurance: auto, homeowners, condo, renters, commercial property and liability, workers' compensation, audited business policies and some specialty, travel, accident and pet policies. Life and health policies handle cancellation values, grace periods and refunds through different provisions.
You may see it in a quote that lists a minimum earned premium or cancellation provision, a binder, the declarations page or premium summary, the cancellation condition, an endorsement that changes the premium, a premium audit statement, a renewal or cancellation notice, or a return-premium calculation. Switching insurers midterm raises the same question, which is where our guide on how to switch car insurance comes in.
How Connecticut and New York handle refunds
In Connecticut, when an insurer cancels a policy, the pro rata unearned premium must be paid directly by the insurer or credited through the producer and promptly repaid to the purchaser or borrower, under Conn. Agencies Regs. § 38a-288-7 (opens in a new tab). When you request the cancellation, it follows the policy contract, with unearned premium paid as the regulation provides. For homeowners policies, a cancellation notice must say that excess premium not tendered by the insurer will be refunded on demand, under Conn. Gen. Stat. § 38a-316f (opens in a new tab).
In New York, when you cancel before expiration, the premium the insurer keeps is set by the applicable rate filing or, if there is none, by the policy, under Insurance Law § 3428 (opens in a new tab). For premium-financed policies, the insurer must return gross unearned premium to the finance company for your benefit within a reasonable time, no more than 60 days after cancellation, and in a specified financed-policy situation may keep a minimum of 10% of gross premium or $60, whichever is greater. In personal auto, the short-rate charge averages about 10% of the unexpired portion, depending on the filed schedule or policy, according to the New York Department of Financial Services (opens in a new tab).
Questions to ask an agent or insurer
- Is my cancellation refund figured pro rata by day or month, or on a short-rate basis? The method decides whether you get the full unused share or a reduced one.
- Does my policy carry a minimum earned premium? A minimum can let the insurer keep more than time-based proration would.
- What exact cancellation date will you use, and when does coverage end? The date sets both the earned and unearned amounts.
- Are fees, taxes, producer charges, premium-finance charges, audits or endorsements part of the refund calculation? These may be handled differently from the base premium.
- When and how will the unearned premium be refunded or credited? State law can set a deadline or route the refund through a premium finance company.
Frequently asked questions
These come up most when a cancellation or refund letter arrives.
Is earned premium the same as written premium?
No. Written premium is the total premium generated when the policy is issued, and earned premium is the share allocated to coverage already provided. During the term, the difference between the two is the unearned premium.
Does paying my premium up front mean it is all earned?
No. You may pay in advance, but the insurer earns premium as coverage is provided over the term. When you paid and the period you were covered are separate questions.
Does filing a claim wipe out my refund?
Not automatically. A claim may affect cancellation rights or policy terms, but whether unused premium comes back depends on the policy, the reason for cancellation, state law and any minimum or short-rate provision. Ask the insurer to show the calculation in writing.
Does earned premium affect my claim payment?
No. A claim payment depends on the policy's coverage, exclusions, limits, deductible, conditions and the facts of the loss. Earned premium only tracks how much of the premium has paid for coverage time.