Annual Premium Equivalent (APE)
What Is Annual Premium Equivalent (APE)?
An annual premium equivalent (APE) is a common sales measure calculation involved by insurance companies in the United Kingdom. The annual premium equivalent is the sum of the total value of customary or recurring-premiums plus 10% of any new single premiums written for the fiscal year. Whenever wanted, the premiums earned by an insurance company can be extended to incorporate all revenues of a given insurance company.
Figuring out Annual Premium Equivalent (APE)
Annual premium equivalent (APE) is specifically utilized when sales contain both single premium and normal premium business. Single premium insurance policies require a single lump-sum payment from the customer or policyholder. The standard premium policies are annualized by taking the premium amount and duplicating it by the frequency of payments in the billing cycle.
The annual premium equivalent calculation is utilized by the insurance industry to permit examinations of new business accomplished in a specific period. A single-payment premium really spreads a deal over a significant stretch of time. On the other hand, a recurring premium includes separate annual premiums. The APE metric is utilized to compare single premium payments to the recurring payment premiums. This cycle assists accurately compare sales between policies with the two unique types of premiums.
Insurance companies commonly adopt the strategy of looking at 100% of customary premiums, for example the annual premiums received for a policy and 10% of single premiums. Be that as it may, this main works under the assumption of a typical life insurance policy enduring 10 years. Thusly, taking 10% of a single premium annualizes the single lump-sum payment received over the 10 years the policy is in effect.
Annual Premium Equivalent versus Present Value of New Business Premiums
The present value of new business premiums (PVNBP) is the wording utilized in the insurance industry to show the current value of total affirmed premiums that will be received from present to future. Present value is a measurement of working out how much a future stream of payments or cash flows are worth in the present dollars.
Working out the current value of future insurance premiums is important in light of the fact that a premium received today is worth more than a similar premium amount due to be paid from now on. The justification for this is that the money received today can be invested and earn a rate of return. Insurance companies earn a lot of investment income from investing premiums received from clients.
Like APE, PVNBP makes it conceivable to compare the sales of two companies having both single premiums and recurring premiums. Be that as it may, it really does something contrary to what APE does when it switches recurring premium income over completely to a single number. All things being equal, PVNBP is the sum of single premiums and the current value of life insurance premiums paid a large number of years.
Special Considerations
While assessing any future measurement, it is important to consider any unexpected occasions and what these occasions might mean for any assumptions and assessments. For instance, while forecasting a company's sales incomes, it's important to think about the competition, their product lines and pricing strategy over the forecasted period. Counting the contenders can assist tweak the forecast, which with willing ideally be more pertinent and give a margin of safety.
Features
- An annual premium equivalent (APE) is a common sales measure calculation involved by insurance companies in the United Kingdom.
- The annual premium equivalent is the total value of customary or recurring premiums plus 10% of new single premiums written in the period.
- The APE metric is utilized by the insurance industry to permit sales correlations for policies with the two distinct types of premiums.
