Excel Tutorial: How To Calculate Earned Premium In Excel

Introduction

Understanding earned premium is crucial for insurance companies and professionals in the industry. It is the portion of the premium that has been "earned" by the insurer, based on the portion of the policy period that has elapsed. Calculating earned premium accurately is important for financial reporting, as it reflects the amount of revenue that can be recognized as the insurance coverage is provided over time. In this tutorial, we will guide you through the process of calculating earned premium in Excel, enabling you to handle this essential task with ease and precision.

Key Takeaways

• Understanding earned premium is crucial for insurance companies and professionals in the industry.
• Calculating earned premium accurately is important for financial reporting and revenue recognition.
• Earned premium is the portion of the premium that has been "earned" by the insurer, based on the portion of the policy period that has elapsed.
• Gathering necessary data and setting up an Excel spreadsheet are essential steps in calculating earned premium.
• Interpreting the results and double-checking calculations is critical to ensure accuracy in determining earned premium.

Understanding Earned Premium

When it comes to insurance, the concept of earned premium plays a crucial role in determining the financial standing of the insurer. Understanding how to calculate earned premium is essential for insurance professionals and financial analysts. In this tutorial, we will delve into the definition of earned premium and discuss the formula for calculating it using Microsoft Excel.

Earned premium refers to the portion of an insurance premium that corresponds to the expired portion of the policy period. In other words, it represents the revenue that the insurer has earned by providing coverage for a certain period of time. For example, if a policy has a one-year term and six months have passed, the earned premium would reflect the portion of the premium that corresponds to the first six months of coverage.

The formula for calculating earned premium is relatively straightforward. It is calculated by multiplying the total premium by the ratio of the expired portion of the policy period to the total policy period. The formula can be expressed as:

Earned Premium = Total Premium x (Expired Policy Period / Total Policy Period)

This formula provides a simple yet effective way to determine the earned premium for a given policy. In the next section, we will demonstrate how to apply this formula in Microsoft Excel to calculate earned premium for insurance policies.

Gathering Necessary Data

Before you can calculate the earned premium in Excel, it is important to gather all the necessary data points. This will include information from insurance policies and databases.

• Policy Effective Date
• Policy Expiration Date
• Total Premium Amount
• Policy Coverage Period
• Any Cancellations or Reinstatements

• Policy Documents: The policy effective and expiration dates, total premium amount, and coverage period can usually be found in the insurance policy documents.
• Insurance Databases: If you are working with a large number of policies, it may be more efficient to gather the necessary data from insurance databases, which can provide the relevant information in a structured format.

Setting Up the Excel Spreadsheet

When it comes to calculating earned premium in Excel, it's important to set up your spreadsheet in a way that allows for easy data input and clear organization. Follow these steps to get started:

• Open a new Excel workbook

Begin by opening a new Excel workbook on your computer. This will serve as the blank canvas for your earned premium calculation.

• Organize the data in a clear and logical manner

Once your workbook is open, it's time to organize the data that will be used for the calculation. Consider creating separate columns for policy number, effective date, expiration date, written premium, and earned premium. This will make it easier to input and reference the necessary information as you work through the calculation.

Applying the Formula

When calculating earned premium in Excel, it is important to input the necessary data into the appropriate cells and use Excel formulas to accurately calculate the earned premium based on the provided information.

• Open a new or existing Excel spreadsheet containing the data needed to calculate the earned premium.
• Identify the cells where the necessary data, such as the policy effective date, policy expiration date, and total premium, will be entered.
• Input the data into the appropriate cells, ensuring that the information is accurately represented in the spreadsheet.

• Once the necessary data has been inputted, use Excel formulas to calculate the earned premium based on the provided information.
• One common formula to calculate earned premium is the pro-rata method, which takes into account the portion of the policy term that has already elapsed.
• For example, the formula to calculate earned premium using the pro-rata method is: (Number of Days Elapsed / Total Number of Days in Policy Term) x Total Premium.
• By using this formula and inputting the relevant data, Excel can automatically calculate the earned premium, providing an accurate and efficient method for insurance professionals and others to determine the earned premium for a given policy.

Interpreting the Results

After calculating the earned premium in Excel, it is important to thoroughly analyze the results to ensure accuracy and alignment with expectations.

• Review the calculated earned premium to ensure it reflects the actual amount that the insurer has earned based on the covered period.
• Compare the calculated earned premium with the expected value to identify any discrepancies that may need further investigation.
• Consider any external factors or changes in the insurance policy terms that may have impacted the earned premium calculation.

• Verify the accuracy of the calculations made in the Excel spreadsheet, including any formulas or functions used to determine the earned premium.
• Review the data entry to ensure that the correct policy information, premium amounts, and policy period dates were used in the calculation.
• Check for any potential errors or inconsistencies in the data that could affect the accuracy of the earned premium calculation.

Conclusion

Accurately calculating earned premium is crucial for insurance companies to ensure financial stability and accurate reporting. By understanding the process and using Excel to perform the calculations, you can improve accuracy and efficiency in your work. I encourage you to practice the Excel tutorial provided to enhance your skills and understanding of this important concept in the insurance industry.