Earned Premium

Earned premium is the share of the total policy premium that the insurer has rightfully earned based on the time coverage has been in force. On a standard annual policy, premium earns proportionally each day. After six months, 50% of the annual premium is earned. The unearned premium is the portion attributable to the remaining coverage period. When a policy is cancelled, the method of calculating the return premium depends on whether the earned premium is calculated pro-rata or short-rate. Pro-rata returns the full unearned premium, while short-rate retains a penalty. In COI compliance, understanding earned premium mechanics helps explain why vendors may resist mid-term cancellations or why replacement policies may have different effective dates. Compliance teams should be aware that policy cancellations triggered by non-payment typically include a short-rate penalty, which may discourage vendors from reinstating lapsed coverage, creating prolonged compliance gaps.