written vs earned premium
Imagine you pay a year of gym membership upfront in January. The gym has your money, but it has not really 'earned' it yet — it earns it month by month as it lets you use the treadmills. Insurance premium works the same way. Written premium is the full amount booked when the policy is sold; earned premium is the slice the insurer has truly earned by providing coverage so far. The gap is money held but not yet earned.
Precisely, written premium is recorded when the policy is written (sold), for the whole term, even though coverage stretches over the year. Earned premium recognizes that revenue gradually as time passes and risk is borne — typically straight-line, so a 1,200 annual policy earns 100 per month. Halfway through, 600 is earned and 600 is unearned. If the policy is cancelled at the six-month mark, the insurer keeps the 600 it earned and refunds the 600 it did not. There is a clean identity over a period: earned premium = beginning unearned + written premium − ending unearned.
This distinction is fundamental because revenue must be matched to the risk period it pays for, not to the moment cash arrived. Loss ratios, rate indications, and profitability are all measured against EARNED premium, because that is the premium standing behind the losses of the same period. Using written premium instead would flatter or distort results, especially for a fast-growing book where written runs ahead of earned. A frequent confusion: written premium is not cash received — installment plans and accruals mean the money and the writing do not move in lockstep.
On 1 October an insurer writes 1,200 of premium for a one-year policy. By 31 December, three months have elapsed, so earned premium = 1,200 × 3/12 = 300, and unearned premium = 900. The 900 sits as a liability until further coverage is provided.
Written = booked at sale; earned = recognized as coverage is provided over time.
Always pair earned premium with the losses of the same period; mixing written premium with incurred losses gives a meaningless ratio. Written premium is also not the same as cash collected — booking and payment can be on different timelines.