What Is Written Premium?
Let me explain written premium to you—it's an accounting term we use in the insurance industry to describe the total amount that customers are required to pay for insurance coverage on policies issued by a company during a specific period of time. Written premiums include the full premium charged for a policy that's already effective, no matter what portions have been earned yet. You should know that written premiums are the principal source of an insurance company's revenues.
Key Takeaways
- Written premium is an accounting term in the insurance industry used to describe the total amount that customers are required to pay for insurance coverage on policies issued by a company during a specific period of time.
- They may be measured as a gross or net figure, which shows how much of the premiums the company gets to keep for assuming risk.
- Written premiums stand in contrast to earned premiums, which is what an insurance company actually books as earnings.
- Written premiums are the principal source of an insurance company's revenues and appear on the top line of the income statement.
How Written Premium Works
People pay for insurance coverage to protect themselves against financial loss—think of it like this: if a policyholder has a car accident and is insured for it, the insurance company has to foot the bill. In exchange for taking on this risk, the company charges its customers premiums.
Premiums for insurance companies are like sales for retailers. Insurance companies sell as many premiums as possible and then use the money they generate to cover losses and expenses, hopefully with enough left to turn a profit.
Written premiums calculate the total amount customers agree to pay for insurance policies sold during the accounting period. For example, if an insurance company over the course of its fiscal year sells 1,000 new contracts that require each customer to pay $1,000 in premiums, its written premiums for that period would be $1 million.
Written Premium vs. Earned Premium
Written premiums are different from premiums earned, which are the amount of premiums that a company books as earnings for providing insurance against various risks during the year. Insured policyholders pay premiums in advance, so insurers do not immediately consider premiums paid for an insurance contract as profit. The insurer can change the status of the premium from unearned to earned only when its full obligation is fulfilled.
Gross Premiums vs. Net Premiums
Written premiums may be measured as a gross or net number.
The gross figure does not factor in deductions from the commission paid to agents who sell the policies, legal expenses associated with settlements, salaries, taxes, clerical expenses, and reinsurance, which is when insurance companies opt to transfer some of their risk to another insurer.
Alternatively, written premiums can be measured as net, a figure that takes into account associated costs linked to a policy. Net premiums written represents how much of the premiums the company gets to keep for assuming risk. As such, looking at changes to net premiums written from year to year is a useful way to gauge the health of insurance companies.
Special Considerations
Written premiums are the principal source of an insurance company's revenues and thus appear on the top line of the income statement. The insurance industry is cyclical, along with the business cycle, and competitive, with numerous participants fighting for market share primarily on the basis of price.
When there is excess underwriting capacity in the industry, prices are pressured downwards. Meanwhile, when there is a shortage of capacity, insurers can exercise a measure of pricing power in premiums.
Other articles for you
The linearly weighted moving average (LWMA) is a technical indicator that weights recent prices more heavily to react faster to market changes.
Bait and switch is a deceptive sales tactic where sellers lure customers with attractive offers that are unavailable to push more expensive alternatives.
The S&P GSCI is a benchmark index tracking global commodities performance through futures contracts.
A short put is a trading strategy where you sell a put option to profit from a stock's price increase by collecting the premium.
The allowance for doubtful accounts is an accounting estimate that reduces accounts receivable to reflect potential uncollectible debts, ensuring accurate financial reporting.
A factor market is where businesses acquire resources like labor, capital, land, and raw materials to produce goods and services.
Pareto efficiency is an economic state where resources are allocated so that no one can be improved without harming another.
Hospital revenue bonds are municipal bonds that fund hospital projects and are secured by hospital revenues, carrying higher risks and potential tax exemptions.
The sharing economy enables peer-to-peer transactions of underused assets via online platforms, facing growth, criticisms, and alternatives like the gift economy.
A noncancellable insurance policy ensures stable disability coverage without cancellations, premium hikes, or benefit reductions by the insurer.