Premium
The amount paid by the insured to the carrier in exchange for insurance coverage over a defined policy period.
What It Is
Premium is the price an insured pays for insurance coverage, typically expressed as an annual amount for commercial policies. Premium calculation involves applying a rate (price per unit of exposure) to the exposure base (the measure of risk being insured). For general liability, the exposure base might be revenue or payroll; for property, it is the total insured value; for commercial auto, it is the number and type of vehicles.
Several premium types exist in commercial insurance. Written premium is the total premium charged for a policy at inception. Earned premium is the portion of written premium that corresponds to the coverage period that has elapsed. Unearned premium is the portion corresponding to the unexpired coverage period. Auditable premium applies to policies where the final premium is adjusted based on actual exposure (such as actual payroll for workers compensation), with the deposit premium collected at inception and the final premium determined by audit after the policy expires.
Minimum premium is the lowest amount a carrier will charge for a policy regardless of the calculated rate times exposure. Minimum and deposit premium establishes a floor that will not be reduced even if the audit reveals lower exposure. Fully earned premium or minimum earned premium provisions specify the minimum amount the carrier retains if the policy is cancelled.
Why It Matters for Brokers
Premium is the foundation of the broker's revenue through commissions and the client's primary cost of risk transfer. Brokers must understand all premium types to properly advise clients on cash flow, audit exposures, and cancellation implications. Misunderstanding audit premium provisions has led to significant surprise charges for clients and E&O claims against brokers.
Real-World Example
A staffing company's workers compensation policy has a deposit premium of $85,000 based on estimated payroll of $4.2M. The policy has a minimum premium of $50,000. During a downturn, actual payroll drops to $2.8M. The audit calculates a final premium of $56,667, resulting in a $28,333 return premium. If the policy had been cancelled mid-term with a minimum earned provision, the full $85,000 might have been retained. The broker's advance explanation of these provisions prevents a surprise.
Common Mistakes
- 1Not explaining audit premium provisions to clients who assume the deposit premium is the final cost, leading to surprise additional premium charges.
- 2Overlooking minimum earned premium provisions when cancelling policies, resulting in clients receiving no return premium despite mid-term cancellation.
- 3Confusing written premium with earned premium when analyzing carrier profitability or account loss ratios.
How brokerageaudit.com Handles This
brokerageaudit.com tracks written, earned, and auditable premium across all policies in an account, automatically calculating earned premium as of any date. The Commission Reconciliation module reconciles commission payments against earned premium to identify discrepancies, and the system flags upcoming audits so brokers can help clients prepare exposure data.