Glossary · Insurance agency commissions
Earned vs. unearned commission
Earned commission is the part of an agency’s commission that rests on coverage the carrier has already provided; unearned commission rests on the part of the term still ahead. If a policy cancels mid-term, carriers usually take back the unearned share as a chargeback, so commission paid up front is not fully the agency’s until the term runs.
What it means
Property and casualty commission is commonly paid on written premium, at the start of the term or as each installment posts. The carrier, though, earns that premium day by day. The NAIC’s glossary of insurance terms defines earned premium as the “portion of insured’s prepaid premium allocated to the insurance company’s loss experience, expenses, and profit year-to-date.” Commission follows the same split: the share tied to unearned premium is unearned commission.
How it works: on a 12-month policy paid in full, roughly half the commission is unearned at the six-month mark. Nothing happens to it while the policy stays in force. It matters when the policy cancels, because the carrier refunds unearned premium to the insured and usually charges back the commission on it. Your agency agreement decides the exact terms.
How it shows on a commission statement
Statements rarely print the word “unearned.” You see the effect: a negative commission line on a cancellation or a return endorsement, sized to the premium refunded. Some carriers show the return premium and the charged-back commission on one line, others on two. The check is whether the commission taken back matches the unearned share of the refund at the rate originally paid.
Example
- Annual premium, paid in full
- $2,400.00
- Commission paid at new business, 12%
- $288.00
- Cancelled after 4 of 12 months: unearned premium
- $1,600.00
- Unearned commission charged back (12% of $1,600)
- −$192.00
- Commission the agency keeps, earned
- $96.00
Commonly confused
- Unearned premium is the insured’s money for coverage still ahead; unearned commission is the agency’s share of it. See unearned premium.
- Written vs. earned premium is about when the carrier books revenue; earned vs. unearned commission is about what you could be asked to give back. See written vs. earned premium.
- Advanced commission in life insurance is a separate arrangement: an advance against commission not yet earned under the carrier’s terms. See advanced commission.
Common mistakes to check
- Booking all commission as income the day it is paid, then being surprised by chargebacks on cancellations.
- Accepting a chargeback larger than the commission on the unearned premium that was refunded.
- Figuring the chargeback at today’s rate instead of the rate the policy was originally paid at.
- Missing that a short rate or minimum earned premium provision should have left more commission with you.
Questions
When is insurance commission considered earned?
In property and casualty, commission is usually treated as earned in step with the premium: day by day over the policy term. Until then a share of it can be charged back if the policy cancels. Your agency agreement and the carrier’s terms set the exact rule.
Do I have to return unearned commission when a policy cancels?
Usually yes: when a carrier refunds unearned premium to the insured, it generally charges back the commission on that refund. The amount depends on the cancellation method (pro rata, short rate or flat) and on your agreement.
Is unearned commission a liability for an agency?
It can be, because it may be charged back. How an agency accounts for it is a question for its accountant; this glossary is not accounting advice.
Sources
- National Association of Insurance Commissioners, Glossary of Insurance Terms, entry for earned premium. Retrieved October 12, 2026.
Lapidar is commission reconciliation software for independent insurance agencies, in its founding pilot. Related: commission chargeback calculator.