Daily, Monthly, and 1/24 Premium Earning Methods

Why Premium Earning Depends on Timing

Written premium is associated with coverage, but the amount written on a policy is not necessarily all earned on the date it is recorded. As coverage is provided over time, premium is earned. For annual policies with uniform coverage, the daily method measures that time directly; monthly and 1/24 methods approximate it using calendar-month conventions.

The methods can produce different earned premium at a reporting date, especially when policies begin near the middle or end of a month. The distinction is not merely arithmetic: each method represents a different assumption about when coverage began within the month. For this tutorial, policies are hypothetical, have a fixed annual premium, and provide uniform coverage over a one-year term. Assume there are no cancellations, endorsements, or other premium changes during the term.

Definition: Earned premium is the portion of written premium assigned to coverage already provided by a specified valuation date. Unearned premium is the portion assigned to future coverage. Under a fixed-premium policy with no adjustments, earned plus unearned premium equals the policy premium.

Three Earning Conventions

The daily method uses the actual number of coverage days elapsed. If a policy has premium $P$, a term of $D$ days, and $d$ covered days have elapsed by the valuation date, then its earned premium is the premium multiplied by $d/D$. Use the policy's actual term length, including a leap day if it falls within the term. Under this method, the day-count convention must be stated consistently; here, coverage on the effective date is included.

EP_{\text{daily}}=P\frac{d}{D}

The monthly method used here is the 1/12 approximation: treat each annual policy as if it began on the first day of its issue month, and earn one-twelfth of its premium for each calendar month in which it is in force. Thus, a policy issued in April has three months earned by the end of June: April, May, and June. This convention generally counts more time as earned than a policy-level daily calculation when the actual effective date is later than the first of the month.

The 1/24 method is an aggregate approximation for annual policies grouped by the calendar month in which their premium is written. It assumes premiums are written uniformly through each month. A cohort therefore earns, on average, half a month's premium in its issue month, a full month's premium in each of the next eleven months, and the remaining half month in its final calendar month. It is most useful when monthly written premium totals are available but exact policy effective dates are not.

Conditions: The formulas below assume annual policies, uniform earning over the term, and unchanged premium. The 1/24 formula also requires monthly written premium totals for annual policies and assumes writing is spread uniformly through each month. These approximations are not automatically appropriate for nonannual terms, nonuniform coverage, or premium changes during a policy term.

Worked Examples

Worked Example: One Policy Under All Three Methods

A hypothetical annual policy has premium $1,200 and begins on April 20, 2025. Its coverage ends on April 20, 2026, so the term is 365 days. Calculate earned premium at the end of June 30, 2025 under the daily, monthly 1/12, and 1/24 conventions.

Daily method. Count the covered days from April 20 through June 30: April 20–30 contributes 11 days, May contributes 31, and June contributes 30. Therefore $d=11+31+30=72$, and $D=365$.

EP_{\text{daily}}=\$1{,}200\left(\frac{72}{365}\right) =\$236.7123\ldots=\$236.71

Monthly 1/12 method. Under the stated first-of-month assumption, April, May, and June are three earned months:

EP_{\text{monthly}}=\$1{,}200\left(\frac{3}{12}\right)=\$300.00

1/24 method. For an April issue-month cohort, April contributes $1/24$ of premium and May and June each contribute $2/24$. The cumulative earned fraction by June 30 is $5/24$:

EP_{1/24}=\$1{,}200\left(\frac{1+2+2}{24}\right) =\$250.00

Check. The results are $236.71 daily, $250.00 by 1/24, and $300.00 by monthly 1/12. The monthly method treats the policy as effective 19 days earlier than its actual date; the 1/24 assumption places the average issue date near mid-April. The methods therefore differ for a single policy, even though they all allocate the same total $1,200 over the full term. The common mistake avoided here is treating the three conventions as interchangeable.

Worked Example: Applying the 1/24 Method to Monthly Totals

A hypothetical insurer has annual policies and records the following written premium: $24,000 in April, $36,000 in May, and $48,000 in June. There was no written premium in the preceding twelve months. Estimate earned premium in June using the 1/24 method, and compare it with the monthly 1/12 method.

For June under 1/24, June-written premium contributes $1/24$, while May- and April-written premium each contribute $2/24$. No earlier cohorts contribute in June because none were written.

EP_{\text{June},1/24} =\frac{\$48{,}000}{24} +\frac{2(\$36{,}000)}{24} +\frac{2(\$24{,}000)}{24}

Calculate the terms: $\$48{,}000/24=\$2{,}000$, $2(\$36{,}000)/24=\$3{,}000$, and $2(\$24{,}000)/24=\$2{,}000$. Thus June earned premium is $\$2{,}000+\$3{,}000+\$2{,}000=\$7{,}000$.

Under the monthly 1/12 method, each of the April, May, and June cohorts earns one-twelfth of its written premium in June. The June earned amount is $(\$24{,}000+\$36{,}000+\$48{,}000)/12=\$108{,}000/12=\$9{,}000$. The difference is $2,000 because 1/12 treats the issue month as a full earned month, while 1/24 assigns it only half a month on average.

Check. The 1/24 result includes the three relevant cohorts with weights $2/24, 2/24,$ and $1/24$, giving $7,000; the monthly result is $9,000. Do not apply $1/24$ to every cohort without doubling the weight for a full month of earning.

Worked Example: Comparing Issue Dates Near Month Ends

Two hypothetical annual policies each have premium $2,400. Policy A begins November 16, 2025; Policy B begins December 16, 2025. Each policy ends on its anniversary in 2026. Calculate earned premium for each at February 28, 2026, using all three conventions. The actual term for each is 365 days.

Policy A, daily. Covered days through February 28 are 15 days in November (November 16–30), 31 in December, 31 in January, and 28 in February. Thus $d=15+31+31+28=105$.

EP_{\text{daily,A}}=\$2{,}400\left(\frac{105}{365}\right) =\$690.4109\ldots=\$690.41

Policy A, monthly and 1/24. The monthly method counts November through February as four months, giving $\$2{,}400(4/12)=\$800.00$. Under 1/24, November contributes $1/24$ and December, January, and February each contribute $2/24$, for $7/24$ in total: $\$2{,}400(7/24)=\$700.00$.

Policy B, daily. Covered days are 16 in December (December 16–31), 31 in January, and 28 in February. Thus $d=16+31+28=75$.

EP_{\text{daily,B}}=\$2{,}400\left(\frac{75}{365}\right) =\$493.1506\ldots=\$493.15

Policy B, monthly and 1/24. The monthly method counts December through February as three months, giving $\$2{,}400(3/12)=\$600.00$. Under 1/24, December contributes $1/24$, while January and February each contribute $2/24$, so the result is $\$2{,}400(5/24)=\$500.00$.

Check. Policy A results are $690.41 daily, $700.00 by 1/24, and $800.00 monthly; Policy B results are $493.15, $500.00, and $600.00, respectively. Each method gives lower earned premium for the later-starting policy. The daily calculation retains the exact date difference, while the other methods place policies into month-based timing categories.

Why the 1/24 Formula Has Its Weights

Let $W_t$ denote annual written premium in calendar month $t$, and assume it is written uniformly throughout that month. For a policy written in month $t$, the average portion earned during that first month is half of a monthly share: $(1/2)(1/12)=1/24$. For each of the next eleven months, the policy earns a full monthly share, $1/12=2/24$. In its final month, it earns the remaining half-month share, $1/24$.

Consequently, in a particular calendar month, the current month's written premium has weight $1/24$; each of the eleven preceding monthly cohorts has weight $2/24$; and the cohort written twelve months earlier has weight $1/24$. This gives the standard 1/24 earned premium formula:

EP_{t,1/24} = \frac{W_t+2W_{t-1}+2W_{t-2}+\cdots+2W_{t-11}+W_{t-12}}{24}

The weights are consistent with full earning over the policy's life: $1+11(2)+1=24$, so all cohort shares together equal $24/24=1$. This also explains why the formula uses a final-month weight from twelve months earlier rather than treating every preceding cohort as a full month's earning.

Choose the data level.
Use daily earning when actual policy dates and term lengths are available. Use 1/12 or 1/24 only when its month-based assumptions fit the data and purpose.

Set the valuation date.
Count coverage provided through that date, using an explicit day-count convention for daily calculations.

Apply the matching time fraction.
Multiply premium by elapsed days over term days, months over twelve, or the appropriate monthly-cohort weights.

Check the allocation.
Over the full term, each unchanged annual premium must be fully earned once—not less and not more.

Common Mistakes and Practical Limits

A frequent 1/24 error is to apply a weight of $1/24$ to every monthly cohort. That incorrectly treats a full month of coverage as only half a month. For the April–June data above, this error gives $(\$48{,}000+\$36{,}000+\$24{,}000)/24=\$4{,}500$, rather than the correct $7,000. The correction is to use $2/24$ for a full month of earning and $1/24$ only for the first or final half-month.

A second trap is mixing conventions: for example, counting full months under the 1/12 method while also applying a half-month adjustment from 1/24. Select one method and follow its timing assumption consistently. Also, a monthly aggregate method cannot recover the exact earned premium of an individual policy from monthly totals alone; it estimates using the cohort assumption.

These methods assume premium earns uniformly. If coverage intensity changes over time, or if a policy has a premium-changing transaction, simply applying a flat time fraction may misstate the premium associated with coverage. The methods also depend on term length: the formulas shown are for annual policies and should not be transferred mechanically to a six-month or multi-year policy. Calculate the actual terms and identify the applicable earning pattern before choosing an approximation.

Key takeaway: Daily earning uses actual covered time; monthly 1/12 treats the issue month as a full month; 1/24 treats monthly premium as written uniformly and allocates half-month weights at the start and end of the annual term. The calculation is only as suitable as the timing assumption behind it.

Check Your Understanding

For each problem, identify the timing convention before calculating.

A hypothetical annual policy has premium $1,460, a 365-day term, and 50 covered days elapsed. What is its daily earned premium? (Answer: $200.00)
An annual policy with premium $960 is written in August. At the end of October, what does the monthly 1/12 method report as earned premium? (Answer: $240.00)
Monthly annual written premium is $12,000 in September, $24,000 in October, and $36,000 in November, with no earlier written premium. Calculate November earned premium under 1/24. (Answer: $4,500.00)
A $1,200 annual policy begins on January 16, 2025, and ends on January 16, 2026. At March 31, 2025, calculate daily earned premium using the 365-day term and counting January 16 as a covered day. (Answer: $246.58)
For the monthly premium cohorts in Question 3, calculate November earned premium under the monthly 1/12 method and state its difference from the 1/24 result. (Answer: $6,000.00; $1,500.00 higher than the 1/24 result)

What You'll Learn