Written Premium

From your point of view, the process is rather simple: you write an insurance company a check on a regular basis and they provide you insurance. You pay, they insure. Not much complexity there.

From the insurer's point of view, the accounting gets a little more complex. When you send your check to the insurance company, you are actually prepaying a portion of your insurance.

Say you pay monthly. You send in your check on February 1. You are pre-paying for coverage during February. The insurance company has been paid, but they still have to deliver their service (which usually consists of waiting by the phone in case something bad happens to you).

Notice how the system is different from, say, how it works when you get a hamburger at McDonald's. You give the cashier money. They give you a burger. The money and the product change hands at the same time.

Or, consider how it works when you get a haircut. Usually, you get the haircut first. Then, you walk over to the register and pay for it. Service, then payment.

The insurance company works the other way. Payment, then service. Plus, there is a gap between the payment and completion of the service. You pay at the beginning of the month. Then weeks tick by before the insurance company has fully finished its job.

Because of all this, there's an accounting distinction between a written premium and an earned premium. A written premium appears on the books at the time the amount is paid. The policy is in effect and the client has written a check for their premium. But the service has yet to be rendered.

An earned premium comes into effect once the period has ended. The insurance company has fulfilled its duty (of hoping nothing bad happened to you during the month). They have earned their money. Earned premium...as opposed to the written premium, which represents a payment received, with a lingering obligation from the insurer.