Property and Casualty Insurance Practice Exam

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Get prepared for your Property and Casualty Insurance Exam with flashcards and multiple choice questions, complete with hints and explanations. Equip yourself with the knowledge and confidence needed to excel!

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What is meant by 'earned premium'?

The total premium collected before any claims are paid.
The premium that has been earned by providing insurance coverage.
The estimated future premium collections from renewals.
The premium income that has not yet been collected.

The correct answer is: The premium that has been earned by providing insurance coverage.

'Earned premium' refers to the portion of the premium that an insurance company recognizes as income for the coverage it has provided during a specific period. It is calculated based on the time that has elapsed in the policy term; for example, if a policy is written for one year and six months have passed, half of the premium is considered earned. This concept is crucial in understanding how insurers account for revenue, as it matches the premium income with the insurance coverage provided. Therefore, it reflects the insurer's financial status more accurately by aligning income with the risk taken on during that time. This is key for maintaining solvency and ensuring that the company can pay future claims. In contrast, the total premium collected before any claims are paid does not take into consideration the time value of coverage provided, and future premium collections from renewals or income that has not yet been collected are not recognized as earned until the coverage is actually delivered.