Business, however, is different.
When you make a deal, the promises you make are usually very explicit. When you buy goods, you are very clearly exchanging a dollar amount for a product. There are also clear boundaries in place to ensure cooperation from all sides in a deal. Insurance falls within business.
Thus, a minimum earned premium is the lowest dollar amount an insurer will take in order to write a business insurance policy. It’s the smallest transaction the insurance company will offer in order to provide coverage.
What is a minimum earned premium?
A minimum earned premium is the specific proportion of your premium an insurer will collect in the event that you cancel your coverage before the end of your term. It may be a large percent, even 100% of your term payment, or it may be lower.
The minimum is there to help the insurer secure some percentage of your end of the deal (payment) for some percentage of their end (protection), even when the deal doesn’t fully work out as planned.
Imagine that you purchase a plan with an annual premium of $1200 and a 50% minimum earned premium. You also agree to pay it in monthly installments. The maximum you would pay for the whole year is $1200. The minimum for an amount of time less than a full year is $600. If you cancel your insurance policy after having paid more than $600 but less than $1200, you wouldn’t be entitled to any refund.
Depending on how long you fulfill your commitment, here are some scenarios that could occur within this hypothetical:
- You carry the plan for the full policy term paying the full $1200.
- You cancel after 3 months, having paid $300, and still owe $300.
- You cancel after 6 months, having paid $600, and fulfill your obligation.
- You cancel after 9 months, having paid $900, and fulfill your obligation.
Why do insurers have these policies?
Insurance providers have these policies in order to protect themselves from losses resulting from broken commitments. Minimum earned premiums are not malicious; they’re not intended to be a penalty, even if they function like one in practice.
They’re there as a basic security measure.
Analogous in other industries
You can think of minimum earned premiums like other practices that are commonplace across various industries, from healthcare to real estate to retail. Some of these practices include:
- Cancellation fees
- No-refund policies
What all these policies share is that they secure a certain percentage of a transaction for one party, whether directly (down payments) or indirectly (cancellation fees). In addition, the amount secured varies from 100% (no-refund policies) to lower required percentages (deposits).
Security and fairness
Why is it important to secure a percentage?
Put yourself in the shoes of your insurance carrier for a moment: just as you expect to receive the coverage you pay for as a policyholder, your insurer has a similar expectation that they will receive what you paid in exchange for it through your policy.
Ultimately, these policies ensure a level of fairness. In the event that you cancel before your term is up, you’re still accountable for an agreed-upon percentage of what you’d pay if you kept the commitment the entire time.
Why do policyholders cancel?
For the most part, policyholders cancel because terms they agreed to are no longer possible or preferable.
However, minimum earned premiums’ primary function is to dissuade abusing insurance policies.
Bad faith cancellations
Sometimes, a policyholder might purchase a plan for a longer term than is required with the intention of canceling it after a short-term need. This is a way to game the system and try to get coverage for a short-term event at a lower cost.
Minimum earned premiums stop this from happening.
This is the kind of behavior that minimum earned premiums explicitly protect against. However, it’s certainly not the only reason policyholders cancel plans.
Most cancellations are earnest.
Good faith cancellations
There are many reasons a policyholder might have to cancel a plan mid-term and in good faith. While they vary from case to case, most boil down to two major factors:
- Compromised finances – It’s completely normal to weather financial hardships that make certain expenses unaffordable. Policyholders might cancel a plan before its term is finished to recover the premium (or a portion of it), especially if they can’t afford it any longer.
- No longer need coverage – A person’s need for coverage can change over time. If it decreases significantly (or completely evaporates), a policyholder might cancel a plan that’s no longer needed.
In any good-faith cancellation, the ultimate deal-breaker is someone’s needs—specifically, a change in them
Thimble: simplifying small business insurance
Minimum earned premiums are their own bits of insurance—they protect insurers from risk. If a policyholder cancels a plan (whether in good faith or not), then the insurer has some degree of protection in place.
At Thimble, we know that people don’t like canceling plans, skipping on commitments, and rearranging their busy schedules.
That’s why we’ve created business insurance that works when you do, on your terms.
When it comes to a policyholder’s changing needs, Thimble’s flexible insurance makes it easy to adapt on the fly. Here at Thimble, we offer general liability insurance and professional liability insurance policies that help protect small businesses from third-party claims of:
- Bodily injury
- Property damage
- Personal injury
- Advertising injury
- Professional negligence
We appreciate the uniqueness and flexibility of your schedule and the awesome work it empowers you to do. That’s why we’ve redesigned the way that insurance agreements work by enabling you to purchase coverage when you need it: by the hour, the day, or the month.
Are you here because sometimes, well, your needs change? Jobs fall through? Not a problem. At Thimble, you can cancel your policy penalty-free up to an hour prior to when the terms are set to begin.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.