Definition:Minimum earned premium
💰 Minimum earned premium is a contractual provision in an insurance policy that guarantees the insurer will retain a specified minimum amount of earned premium regardless of whether the policyholder cancels the policy before its expiration date. Common in commercial lines, specialty, and surplus lines business, this provision protects the carrier from absorbing the fixed costs of underwriting, policy issuance, and risk assessment when a policyholder walks away shortly after inception.
🔄 When a policy includes a minimum earned premium clause, it typically states either a flat dollar amount or a percentage of the annual premium — often 25% to 50% — that the insured owes even if the policy is cancelled on day one. If the policyholder cancels mid-term and the pro-rata earned premium exceeds the stated minimum, the standard earned-premium calculation governs the return premium. But if the pro-rata amount falls below the minimum, the carrier retains the minimum instead. Brokers negotiating on behalf of their clients should ensure the minimum earned premium terms are clearly disclosed, as disputes can arise when an insured expects a larger refund than the clause permits. The provision is especially prevalent in policies with significant upfront acquisition costs, such as D&O, cyber, and program business placed through MGAs.
📌 Getting this provision right matters for both sides of the transaction. For carriers and MGAs, minimum earned premium clauses stabilize revenue projections and ensure that the expense of putting a risk on the books is recovered — a concern amplified in lines where commission payments to producing brokers are made at inception. For insureds, the clause represents a financial commitment that should factor into purchasing decisions, particularly for startups or project-specific coverage where the duration of need is uncertain. Reinsurers also pay attention to these provisions, since the ceding company's premium retention practices affect the premium volume flowing into treaty arrangements and, consequently, the reinsurer's own exposure calculations.
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