[Underwriting and Rating: Setting Insurance Rates]Which statement best describes unearned premium?

Unearned premium is the portion of the premium that corresponds to the period of insurance not yet elapsed. When an insured prepays a premium (often for a 12-month policy), the insurer earns that premium gradually over the policy term as time passes. Any amount relating to future coverage—coverage the insurer has not yet provided—is considered unearned premium. It represents a liability on the insurer’s balance sheet because if the policy is cancelled, the insurer must refund the unearned portion to the insured, subject to policy terms.

Option A is the opposite: that describes earned premium, not unearned premium. Option B is incorrect because unearned premium is unrelated to claims payments; it is a time-based accounting concept. Option D is incorrect because broker commissions are not part of earned or unearned premium calculations; they are an expense paid out of the premium.

Therefore, the correct definition is C: the premium for the remaining period of insurance that has not yet passed.