What is written premium?

In the insurance industry, the written premium is used as an accounting term that highlights the amount customers need to pay in exchange for the insurance coverage extended by the company for a specific duration. Therefore, a written premium is the primary source of income for the insurance company.

Frequently asked Questions (FAQs)

What is gross written premium?

Gross written premium is a measure used in the insurance industry to describe the premium due on the life insurance and general insurance for a specific duration before making any deduction for expenses. It can be understood as a premium figure that includes the expenses like a commission paid to the insurance agent or seller, salaries, tax-related deductions, legal expenses associated with the insurance policy, reinsurance, and clerical expenses. Reinsurance stands for the method adopted by the insurance company for transferring the part of the risk to another insurance firm.

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What is the meaning of gross net premium income?

The dollar amount of the premium that is used for ascertaining the portion of the amount owed to a reinsurer is known as gross net premium income. Based on the gross net premium income, a reinsurance premium is applied. The calculations include premiums paid for coverage, refunds, and cancellations.

What is the working of written premium?

The reinsurance contract defines the method that will be utilised for the calculation of the subject premium. The insurance provider and buyer agree upon the reinsurance premium percentage rate that will be applied on the subject premium.

Subject premium is also known as underlying premium and base premium. The base premium is calculated based on the written or earned premium.

The earned premium is calculated by taking gross net earned premium income as a base. For calculating the written premium, gross net written premium income (GNWPI) is utilised.

GNWPI is calculated by using the insurer’s premium income instead of the premium receipt. When the term “net” is used, it indicates that the premium paid, refunds, and cancellation expenses are deducted. On the other hand, when “gross” is used, then it indicates that no expenses have been deducted.

With the increase in the risk amount of the reinsurer, the earned premium income will decrease than written premium income.

What are the special considerations in gross written premium?

The reinsurance contract defines the method that will be utilised for the calculation of the subject premium. The insurance provider and buyer, both agree upon the reinsurance premium percentage rate that will be applied on the subject premium.

Subject premium is also known as underlying premium and base premium. The base premium is calculated on the basis of the written or earned premium.

The earned premium is calculated by taking gross net earned premium income as a base. For calculating the written premium, gross net written premium income (GNWPI) is utilised.

GNWPI is calculated by using the insurer’s premium income instead of the premium receipt. When the term “net” is used then it indicates that the premium paid, refunds and cancellation expenses are deducted. On other hand, when “gross” is used, then it indicates that no expenses have been deducted.

With the increase in the risk amount of the reinsurer, the earned premium income will decrease than written premium income.

What are the types of premiums?

The insurance companies adopt numerous techniques and methodologies for calculating the premium amount, and the most common approaches are earned premium and written premium. Let’s discuss all the premium types in detail.

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Net premium

Insurance companies face different types of risk, and to minimise the risk factor; they take support from the reinsurance companies. Reinsurance companies help by taking the full or partial risk of the insurance companies. For sharing the risk, insurance companies generally share the premium amount paid by the client. When the reinsurance amount is deducted from the total amount, it is termed as the net premium. This is the amount that the insurance companies earn after making premium payments for reinsurance.

Written Premium

Written premium is the amount earned by a new insurance company during a specified period by selling premium coverage. For instance, XYZ insurance company sells 50 premium coverage for $100 during a fiscal year. Then the written premium of XYZ will be $5,000. In written premium, the total amount earned is considered, and the expenses are not included.

Gross written premium

It is a subpart of the written premium, and $5,000 from the above example is also the gross written premium. If the expenses were deducted, then it will be known as the net written premium.

Earned premium

The earned premium is the earnings of the company for a specific period. For instance, if a company calculates the earned income for a month, then the company will multiply the premium earned within a month with the number of customers. Thus, the amount that the company has in hand can be termed as the earned premium. The cash in hand is utilised for paying off the company’s expenditure. Earned premium is reported on the top of the insurance company’s financial statements.