Earned premium for coverage extending beyond expiration must be computed how?

Earned premium for coverage extending beyond expiration must be computed how?

• A. Flat fee
• B. Pro rata based on the previous year's rate
• C. Double the monthly rate
• D. Not applicable

Answer: (B)

Earned premium represents the portion of the premium that corresponds to the time the insured actually had coverage. When coverage extends beyond the expiration date, the amount earned for that extended period is calculated on a pro rata basis using the rate from the previous policy term. This keeps the pricing consistent with the risk that was already insured and avoids applying the new term’s rate to the extension before renewal. For example, if the annual premium is $1,200 and the policy runs for 12 months, the extension of three months beyond expiration would be billed as 3/12 of that previous-year rate, i.e., $300, using the prior rate. The other methods—a flat fee, doubling the monthly rate, or saying it’s not applicable—don’t align with how earned premium is normally determined for time-based coverage extensions.

Earned premium represents the portion of the premium that corresponds to the time the insured actually had coverage. When coverage extends beyond the expiration date, the amount earned for that extended period is calculated on a pro rata basis using the rate from the previous policy term. This keeps the pricing consistent with the risk that was already insured and avoids applying the new term’s rate to the extension before renewal.

For example, if the annual premium is $1,200 and the policy runs for 12 months, the extension of three months beyond expiration would be billed as 3/12 of that previous-year rate, i.e., $300, using the prior rate. The other methods—a flat fee, doubling the monthly rate, or saying it’s not applicable—don’t align with how earned premium is normally determined for time-based coverage extensions.