Net Premium
What Is Net Premium?
Net premium, an insurance industry accounting term, is calculated as the expected present value (PV) of an insurance policy's benefits, minus the expected PV of future premiums. The net premium calculation doesn't consider future expenses associated with keeping up with the insurance policy.
Net premiums, along with gross premiums, assist an insurance with companying to determine the amount it owes in state taxes.
Net Premium Explained
A insurance policy's net premium value varies from the policy's gross premium value, which considers future expenses. The calculated difference between net premium and gross premium equals the expected PV of expense loadings, minus the expected PV of future expenses. Subsequently, a policy's gross value will be not exactly its net value when the value of future expenses is not exactly the PV of those expense loadings.
A few states' tax laws might permit insurance companies to reduce their gross premium by accounting for expenses and unearned premiums.
Net Premium Tax Laws
Since the net premium calculation doesn't consider expenses, companies must determine how much expense they can add without causing a loss. Types of expenses that a company must account for incorporate commissions paid to agents who sell the policies, legal expenses associated with settlements, salaries, taxes, clerical costs, and other general expenses.
Commissions normally shift with the policy's premium, however broad and legal expenses may not be tied to the premium.
Assessing Allowable Added-Back Expenses
To estimate permitted expenses, a company can add a fixed amount of expenses to the net premium (called flat loading), add a percentage of the premium, or add a combination of a fixed amount and a percentage of the premium.
While contrasting policies and different net premiums, adding a fixed amount will lead to similar extent of expenses to premiums insofar as expenses truly do change by extent to the premium. Determining which method to utilize relies upon the general and legal expenses associated with the policy, as they connect with commissions on the premium.
Most policy calculations leave a margin for [contingencies](/possibility, for example, when the money produced using investing the premiums ends up being not exactly expected.
Significance of Net Premium
Net premiums and gross premiums are useful in sorting out how much an insurance company owes in taxes. State insurance divisions frequently tax insurance companies' income. Tax laws, nonetheless, may permit companies to reduce their gross premium by figuring in expenses and unearned premiums.
For instance, in the event that the state of Ohio forces a tax on gross premiums written by Ohio insurance companies, yet the tax doesn't matter to amounts deducted for reinsurance, it likewise will not have any significant bearing to gross premiums not earned in light of the fact that the insurance company or policyholder canceled a policy before it expired.
Features
- The formula to show up at the net premium is the expected present value (PV) of an insurance policy's benefits minus the expected PV of future premiums.
- A few states' tax laws permit insurance companies to reduce the amount of their taxable gross premium by adding back expenses.
- Net premium is an insurance industry accounting term.
- Net premium and gross premium are valuable in working out the amount of state taxes an insurance company requirements to pay.
