Premium Financing

Definitions

Premium financing
The payment of premiums by a premium finance company (which may or may not be affiliated with an insurer), which then bills the insured in installments for a portion of the premium plus a finance charge. If the insured-debtor fails to make a payment, the finance company requests cancellation of the policy pursuant to an assignment of rights by the insured, and the lender receives the unearned premium refund.

Adjustable premium
A premium that can vary. An insurer retains the right to change the premium or premium rate structure on a class of insureds or business during the year and apply the new rates to renewal policies.

Cancellation
The termination of an in-force insurance contract by either the insured or the insurer. Termination may be voluntary, involuntary, or mutual in accordance with provisions contained in the contract.

Deposit premium
A partial payment of premium to an insurer that may later be adjusted up or down; an initial premium, as close to the final premium as possible, that can be modified later (e.g., after the close of the policy year) by an audit of the insured’s records.

Direct bill
A statement of insurance premium due that is sent directly by an insurer to the policyholder.

Earned premium
The portion of a premium that represents coverage already provided; the portion of premium that belongs to the insurer based on the part of the policy period that has passed. For each day a one-year policy is in force, an insurer earns 1/365th of the annual premium. For an insurer’s accounting purposes, earned premium is the total of all premiums written during a period plus the unearned premiums at the beginning of the period, minus the unearned premiums at the end of the period.

Flat cancellation
Cancellation of a policy on its effective date as if it had never been issued. No coverage was provided and no premium is due.

Fully earned premium
A policy provision that all or a specified portion of the premium is fully earned by the insurer when the policy is first issued. It is usually found only in excess and surplus lines policies. Even if a policy is canceled early in its term, the insurer retains the portion of the premium indicated under this provision. For example, a policy may provide that the premium is 25% fully earned at inception.

Maximum premium
The highest premium an insurer can charge for a policy that is subject to an audit or a unique rating plan.

Minimum premium
The lowest premium amount for which an insurance company will issue a policy or will include a particular coverage in a policy.

Premium
The price for coverage of a particular risk or set of risks described in the insurance policy during a specific period of time. The premium is the price (insured’s cost) expressed as a periodic sum, while the rate is the price per unit of coverage (for example, the premium for each $100 of property value).

Premium finance company errors and omissions insurance
Errors and omissions coverage for insurance premium finance companies to pay damages in the event they allow an insurance policy to be incorrectly canceled or let a policy lapse.

Pro rata cancellation
An insurer’s termination of a policy before the expiration date. Premiums returned to the insured are in proportion to the days remaining in the policy period, with no penalty because the insurer initiated the action.

Retrospective rating plan
A method of establishing a premium on large commercial accounts. The final premium is based on the insured’s actual loss experience during the policy term, subject to a minimum and maximum premium, with the final premium determined by a formula. Under this plan, the current year’s premium is based on the current year’s losses, although the premium adjustments may take months or years beyond the current year’s expiration date. The rating formula is guaranteed in the insurance contract. Formula: retrospective premium = converted loss + basic premium × tax multiplier. Numerous variations of this formula have been developed and are in use.

Return premium (RP)
The portion of the premium returned to an insured as the result of cancellation, rate adjustment, deletion or reduction in coverage or an error in calculation of the initial premium.

Short-rate cancellation
The termination of a policy contract before the expiration date at the request of the insured. Premiums returned to the insured are not in direct proportion to the days remaining in the policy period because of fixed expenses incurred by the company.

Unearned premium
The amount of premium remaining after deducting the earned premium from written premium; the portion of a premium representing the unexpired part of the policy period. Since coverage has not yet applied to the unexpired period, the insurer has not yet earned that portion of the premium.

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