What Is Written Premium?
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. Written premiums factor in the amount of premium charged for a policy that has already become effective, regardless of what portions have been earned. Written premiums are the principal source of an insurance company’s revenues.
Key Takeaways
- Written premium is an accounting term used to describe the total amount customers are required to pay for insurance coverage on policies issued during a specific period.
- They can be measured as a gross or net figure, indicating how much of the premiums the company retains for assuming the risk.
- Written premiums differ from earned premiums, which are what an insurance company actually books as earnings.
- Written premiums are the main revenue source for insurance companies and appear on the top line of the income statement.
How Written Premium Works
People pay for insurance coverage to shield themselves from financial loss. For example, if a policyholder is involved in a car accident and is insured, the insurance company is required to cover the expenses. In return for taking on this risk, the company charges its customers premiums.
Premiums for insurance companies are akin to sales for retailers. Insurance companies strive to sell as many premiums as possible and then use the revenue to cover losses and expenses, with the goal to achieve profitability.
Written premiums calculate the total amount customers agree to pay for insurance policies sold during the accounting period. For instance, if an insurance company sells 1,000 new contracts in its fiscal year, with each customer required to pay $1,000 in premiums, the written premiums for that period would be $1 million.
Written Premium vs. Earned Premium
Written premiums are distinct from premiums earned, which are the amount of premiums a company records as earnings for providing insurance against various risks during the year. Insured policyholders pay premiums upfront, so insurers do not immediately regard premiums paid for an insurance contract as profit. The insurer changes the premium status from unearned to earned only when its full obligation is fulfilled.
Gross Premiums vs. Net Premiums
Written premiums can be measured gross or net.
The gross figure does not consider deductions like commissions paid to agents, legal expenses related to settlements, salaries, taxes, clerical expenses, and reinsurance, where insurance companies transfer some risk to another insurer.
Conversely, net premiums written are calculated by accounting for associated costs linked to a policy. Net premiums represent the amount of premiums the company retains for assuming risk, providing a useful gauge of the health of insurance companies when observed year-to-year.
Special Considerations
Written premiums are the primary revenue source for insurance companies and appear on the top line of the income statement. The insurance industry is cyclical and competitive, with multiple players vying for market share predominantly on price.
When the industry experiences excess underwriting capacity, prices are driven downwards. Conversely, a shortage of capacity enables insurers to exercise pricing power over premiums.
Related Terms: earned premium, gross premium, net premium, insurance revenue.
