Premium calculations explained

As one of the most important data points in BriteCore, premium records are calculated daily and drive nearly all reports and accounting processes.

Core concepts

  • Written premium:
    • Insurance: A contractually determined amount the reporting entity charges the policyholder for the effective period of the contract.

      Note: Written premium is based on the expectation of risk, policy benefits, and expenses associated with the coverage provided by the terms of the insurance contract.

    • Business user: The cost of the insurance policy over its term.
  • Earned premium:
    • Insurance: The portion of the insured’s prepaid premium allocated to the insurance company’s loss experience, expenses, and profit year-to-date.
    • Business user: The cost of the insurance policy divided by the number of days the policy is effective.Example: A $365 policy on a one-year term earns $1/day in a standard 365-day year.
  • Unearned premium:
    • Insurance: The amount of premium for which coverage hasn’t yet been provided.
    • Business user: The premium left to be earned on the policy for the term.

Example

Figure 1: Written, earned, and unearned premium example.
  • Policy 1 is written on 1 February for $365.
  • On February 1, the policy has earned $0 and has $365 of unearned premium.
  • At the end of February, the policy has earned $28 and has $337 of unearned premium.
    • The policy earned $28 because there are 28 days in February in a standard year.
    • The policy has an unearned premium of $337 because there are 337 days remaining in the year term (365-28 =337).
  • At the end of March, the policy earned an additional $31, and the unearned premium is now $306.
    • The policy earned $31 because there are 31 days in March.
    • At the end of March, the policy has earned $59 in total (28+31 = 59).
  • At the end of April, the policy earned an additional $30.