Which of the following is the correct formula to calculate the earned premium?

Question

Options

• AEarned premium = (Policy premium x Unexpired coverage days) / Total number of days in the
• BEarned premium = (Interest premium + Unexpired coverage days) / Total number of days in the
• CEarned premium = (Policy premium x expired coverage days) / Total number of days in the policy
• DEarned premium = (Overhead premium _ Unexpired coverage days) / Total number of days in the

• A
  4% (1)
• B
  8% (2)
• C
  75% (18)
• D
  13% (3)

Explanation

Option C is correct because earned premium represents the portion of a policy's premium that corresponds to coverage already provided - the time that has expired - so you multiply the policy premium by the expired (past) coverage days and divide by the total policy days.

Why the distractors are wrong:

• A uses unexpired days, which would calculate the unearned premium (the portion returned if a policy is cancelled), not the earned portion.
• B introduces "interest premium," which is not a real component of the earned premium formula - this is a fabricated distractor.
• D uses "overhead premium" with a subtraction-style separator (_), which is also nonsensical - overhead is not part of this calculation.

Memory tip: Think of "earned = already done." You've earned the premium for days that have already passed (expired), so use expired days in the numerator. If you see "unexpired," flip your thinking - that's what would be returned, not earned.

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