Definition:

Premiums Earned refers to the portion of an insurance premium that has been "earned" by the insurer, representing the amount of premium that corresponds to the coverage provided during a specific period.

Examples

If an insurance company sells a one-year policy for $1,200, it earns $100 in premiums each month as the coverage is provided.

Formula:

Premiums Earned = (Total Premiums Written / Policy Term) * Time Elapsed

How to use the metric:

This metric helps insurers assess their revenue from premiums over a specific period, providing insight into financial performance and helping in financial planning and analysis.

Limitations:

Premiums Earned do not account for claims or expenses, so it doesn't provide a complete picture of profitability. It also assumes a linear earning of premiums, which may not reflect actual risk exposure.

Applies to:

Insurance industry, particularly property, casualty, life, and health insurance sectors, where policies are sold for specific terms.

Doesn't apply to:

Industries outside of insurance, such as manufacturing or retail, because they do not deal with insurance policies or premiums.

Summary:

Premiums Earned is a key financial metric in the insurance industry, representing the portion of premiums that corresponds to the coverage provided over a specific period. It is crucial for assessing revenue but does not provide a complete picture of profitability due to its limitations.