What Is Written Premium?
In the insurance business, the word “written premium” refers to the entire amount that policyholders must pay for insurance coverage under policies issued by an organization during a specific period. Written premiums consider the premium amount paid for a policy already in force, regardless of the number of earned components. The primary source of income for an insurance firm is written premiums.
How Written Premium Works
Individuals purchase insurance to safeguard themselves from monetary loss. For instance, if a policyholder is in an automobile accident and has insurance, the provider must pay for it. The corporation charges its clients premiums in return for assuming this risk.
Insurance firms’ premiums are similar to merchants’ sales. Insurance firms try to sell as many premiums as possible and then use the proceeds to pay claims and losses, ideally leaving a profit.
Written premiums determine the total sum clients agree to pay for insurance policies sold during the accounting period. For instance, an insurance company’s written premiums for a given fiscal year (FY) would be $1 million if it were to sell 1,000 new contracts with $1,000 rates for each client.
Earned versus Written Premium
Written premiums are not the same as those earned, which are the sums of money an organization records as profits for providing insurance coverage against a range of risks annually. Because insured policyholders pay premiums upfront, insurers do not see money paid for insurance contracts as profit. The insurer can only alter the premium status from unearned to earned after meeting its obligation.
Comparing Gross and Net Premiums
Written premiums may be expressed as a net or gross amount.
Deductions from the commission given to agents who sell policies, settlement-related legal costs, wages, taxes, administrative expenses, and reinsurance—the practice by insurance firms of shifting some of their risk to another insurer—are not included in the gross amount.
As an alternative, written premiums may be calculated as net, which accounts for other expenses related to the insurance. The phrase “net premiums written” denotes the premiums the business keeps after taking on risk. For this reason, examining variations in net premiums issued over a year is a helpful indicator of the health of insurance firms.
Particular Points to Remember
The top line of the income statement for an insurance firm represents written premiums, which are the company’s primary revenue source. The insurance market is competitive and cyclical, mirroring the economic cycle. Many players vie for market share, primarily by offering lower prices.
Prices are under pressure to decline when the sector has surplus underwriting capacity. Meanwhile, insurers have some pricing power over rates during periods of capacity scarcity.
Conclusion
- In the insurance business, the word “written premium” refers to the entire amount that policyholders must pay for insurance coverage under policies issued by an organization during a specific period.
- They may be expressed as a gross or net amount, indicating the portion of the premiums the business keeps after taking on risk.
- Earned premiums differ from written premiums or what an insurance firm reports as profits.
- The primary source of income for an insurance firm is written premiums, shown on the top line of the income statement.
