Minimum Earned Premium
Not every business insurance policy is worth millions of dollars. When it comes to smaller organizations, the level of insurance is equal to their value. Thus, the potential refund is reduced when they abruptly end their policy. Or they might not receive a refund at all. The reason for this is the concept of the minimum earned premium.
When a Policyholder Cancels Insurance
The minimum earned premium is engaged when a small business owner decides to cancel their policy mid-way through its run. In some cases, it involves a refund back to the business owner for the amount they already paid into the policy.
Why Insurers Use Minimum Earned Premium
Insurers utilize a minimum earned premium to manage the risk of a business canceling a policy immediately after an issue is resolved. To put it another way, it’s insurance to protect the insurer from greater loss.
Overall, what the insurer does with a minimum earned premium isn’t different than other businesses in different industries. For instance, a company might request a non-refundable down payment on a project to maintain some form of revenue if a cancelation occurs. In the medical sector, cancelation fees are billed to customers who don’t appear for an appointment.
When an insurer enacts a minimum earned premium, it reduces the risk of financial instability. In general, if the insurer needed to refund all the monies from policyholders who canceled midway through a contract they would end up with a deficit.
How It Works
Let’s say a business pays $1,200 for one year of commercial property insurance. For one reason or another, the owners decide to cancel their policy after six months. If no minimum earned premium exists, the formerly insured could be refunded the full amount of their payments. In this case, it would be $600.
On the other hand, if the insurer had a minimum earned premium of $700, then the policyholder wouldn’t receive any refund. The reason is they didn’t pay enough into the policy to receive money back.
In some ways, this feature is similar to a policy’s deductible. For instance, a business could ask for a $1,000 deductible for an individual property damage claim. If the total for repairs was equal to $2,000, then the business would only pay the first half. However, if the repairs only cost $800, then they would need to pay for everything out of pocket.
What Businesses Need to Consider
When a business purchases some form of insurance, it should review the following factors related to refunds:
Is there a minimum earned premium, or is a refund prorated per the amount already paid into the policy?
If it does have a minimum earned premium are other fees also refundable?
Why does the company need to purchase insurance in the first place? Is it temporary to satisfy another industry requirement?
The best way for a business to understand a minimum earned premium and its effects are to contact an insurance agent for additional information.