Premium is collected at the start of the policy, but coverage is delivered over time. Unearned premium is the portion of the written premium that corresponds to the remaining, unexpired part of the policy term. It represents a liability because the insurer has not yet provided that coverage.

As time passes, unearned premium becomes earned premium and is recognized as revenue. If the policy is cancelled mid-term, the unearned portion is usually returned to the policyholder on a pro-rata or short-rate basis. Accurate tracking of unearned premium is essential for both statutory accounting and management reporting.

The unearned premium reserve on the balance sheet must be supported by liquid assets so the company can refund premiums or continue coverage as required. Sudden changes in written premium volume alter the size of this liability and affect reported leverage.

• Premium portion for coverage not yet provided
• Held as a liability until earned
• Returned on mid-term cancellation
• Converted to earned premium as time elapses