What Are Net Premiums Written?
Net premiums written encompass the total premiums an insurance company writes over a period, deducting premiums handed over to reinsurance companies and adding premiums assumed from reinsurers. Net premiums written represent the portion of premiums the company retains for underwriting risks.
Key Takeaways
- Net premiums written are the total written premiums minus premiums ceded to reinsurance companies, plus reinsurance assumed.
- This metric illuminates the extent of business an insurance company handles during a given period.
- Insurance companies must differentiate between earned and unearned premiums when calculating net premiums.
- The calculation must include anticipated future expenses that influence the premiums charged to customers.
Understanding Net Premiums Written
Evaluating year-over-year changes in net premiums written provides keen insights into an insurance company’s vitality. These metrics reflect the spectrum of policies an insurer handles and the associated risk. An uptick in net premiums written often signals more new policies, while a downturn might indicate fewer new issuances. Market competition or uncompetitive premiums could together contribute to a decline.
Companies engaging larger audiences can mitigate potential declines by extending their risk pool.
Premiums may be received either in a lump sum or in installments. Installment payments spread throughout the year transform into net earned premiums as policyholders remit theirs. Adjustments are made to account for tax-related payments, often deducting premiums ceded to reinsurers.
Liabilities arising from unearned premiums should be managed as policy cancellations can obligate repayment of premium portions. More issued premiums relative to earned premiums through the year signify robust business activity.
The Net Premium Calculation
Net premium calculations exclude expenses; hence, companies must cap expenses to avoid financial losses. Setup costs include commissions for agents, legal costs for settlements, salaries, taxes, office expenses, and other overheads. While commissions vary with the premiums, other expenses might remain constant.
Calculating the divergence between net premium and gross premium entails subtracting the projected present value of future expenses from that of expense loadings (costs included in premiums for administration). The gross value of a policy stays below its net value if future expenses surpass their currently evaluated loadings.
Related Terms: Earned Premiums, Reinsurance, Tax Liability, Liabilities, Written Premiums.
References
- Cornell Law School. “26 U.S. Code § 832 – Insurance Company Taxable Income”.
