Premiums are a key form of revenue for an insurance company.

So we should really think about how these revenues are actually recognized, and let's do this in the context of a P&C business.

Now, the accounting rules have one overriding principle for premiums, and that is that they're recognized as they are earned over the coverage period.

But what does this actually mean? Well, let's say an insurance company has written a policy midway through year one.

The premiums for this policy are 1,000 and the coverage period is one year.

Well, even if all the premiums are received in year one, it would be crazy to recognize all of this revenue in year one, as the cover straddles both year one and year two.

The premiums are therefore matched to the period of cover, with 500 recognized in year one and 500 recognized in year two.

We can therefore start to think of premiums in terms of the amount actually received, which is the written premium, and the premiums which are actually earned in a year.

The difference between the written premium and the earned premiums is the unearned premium. So in this situation for year one, we had written premiums of 1,000, we had unearned premiums of 500, and that left us with net earned premiums of 500.

But where does the unearned premium get recorded in the financials? Well, the unearned premium is similar to deferred income, so it should make sense that it's recorded as a liability.

And in fact, this liability is referred to as the unearned premium reserve.

So going back to our example, the company started initially with a zero balance on unearned premium, but then received 1,000 of premium, which is initially unearned.

But by the end of year one, 500 of this has been removed from the unearned premium reserve as it's been earned, leaving a remaining reserve of 500.