What Are Net Premiums Written?
Let me explain net premiums written directly: it's the total premiums an insurance company writes over a period, minus what they cede to reinsurance companies, plus any reinsurance they assume. This figure shows you exactly how much of those premiums the company keeps to cover the risks they're taking on.
Key Takeaways
You should know that net premiums written is simply premiums written minus ceded reinsurance plus assumed reinsurance. This amount reveals how much business the insurance company is handling in a given period. When figuring this out, companies have to account for the difference between earned and unearned premiums. Also, the calculation includes estimates for future expenses, which get built into the premiums charged to customers.
Understanding Net Premiums Written
Track changes in net premiums written year over year to assess an insurance company's health. The company's overall stability ties into the types of policies it issues and the risks involved. An uptick in net premiums written means more new policies are being issued, while a drop signals fewer originations. This decrease might come from competitors grabbing market share or from premiums that aren't competitive. Companies serving a broader customer base can often avoid these declines more effectively.
Insurance companies might collect premiums in a single upfront payment, but they also offer installment options. With installments, premiums come in throughout the year, and this affects how revenue is recorded. As policyholders pay installments, those amounts become net earned premiums. For tax purposes on premiums, reinsurance payments are usually deductible.
You deal with unearned premiums by adjusting for them as liabilities over the year—this is net premiums unearned. It's a liability because if a policy gets canceled early, the insurer must refund part of the premium. If a company writes more premiums during the year, its written premiums will outpace earned ones. In the UK, insurance providers use the annual premium equivalent (APE) to compare new policy premiums against ongoing ones.
The Net Premium Calculation
The net premium calculation doesn't include expenses, so companies must figure out how many expenses they can add without incurring a loss. Consider expenses like commissions to agents, legal costs for settlements, salaries, taxes, clerical work, and general overhead. Commissions often scale with the policy premium, but general and legal expenses might not link directly to it.
The difference between net premium and gross premium is the expected present value of expense loadings—the admin costs baked into the premium—minus the expected present value of future expenses. So, if future expenses are worth less than those loadings, the gross premium will be lower than the net premium.
