when the premium is paid it is considered an unearned premium not a profit that s because as mentioned above the insurance company still has an obligation to fulfill the insurer can change the status of the premium from unearned to earned only when the entire premium is considered profit 
the earned premium for a full year policy paid up front and in effect for 90 days would be for those 90 days say the insurance company records the premium as an earning and the time period hasn t elapsed but the insured party files a claim during that time period the insurance company will have to reconcile its books to unwind the transaction listing the premium as an earning so it makes more sense to hold off on recording it as an earning in the event that a claim is filed special considerationsthere are two different ways to calculate earned premiums the accounting method and the exposure method the accounting method is the most commonly used this method is the one used to show earned premium on the majority of insurers corporate income statements the calculation used in this method involves dividing the total premium by 365 and multiplying the result by the number of elapsed days for example an insurer who receives a 1 000 premium on a policy that has been in effect for 100 days would have an earned premium of 273 97 1 000 365 x 100 the exposure method does not take into account the date a premium is booked instead it looks at how premiums are exposed to losses over a given period of time it is a complicated method and involves examining the portion of unearned premium exposed to loss during the period being calculated the exposure method involves the examination of different risk scenarios using historical data that may occur over a period of time from high risk to low risk scenarios and applies the resulting exposure to premiums earned earned vs unearned premiumswhile earned premiums refers to any premiums paid in advance that are earned and belong to the insurer unearned premiums are different these are premiums collected in advance by insurance companies who are required to give them back to policyholders if coverage is terminated before the period covered by the premium is over say for example you take out an automobile insurance policy and prepay for a six month term if you get into a car crash and total your vehicle in the second month of the policy the insurance company keeps the premiums paid for the first two months these are the company s earned premiums but the remaining four months worth of premiums are returned to the insured party because they are unused they are called unearned premiums similarly if a policyholder pays 200 per month for a 12 month insurance policy and decides to terminate coverage after three months the insurance company keeps 600 as earned premiums and refunds 1 800 to the policyholder as unearned premiums 