Net Premiums Written
What Are Net Premiums Written?
Net premiums written is the sum of premiums written by an insurance company throughout a period of time, minus premiums ceded to reinsurance companies, plus any reinsurance assumed. Net premiums written addresses the amount of the premiums the company will keep for assuming risk.
Figuring out Net Premiums Written
Seeing changes in net premiums written from one year to another is one method for checking the wellbeing of an insurance company. The strength of an insurance company relies upon the types of policies and the risks associated with those policies. An increase in net premiums written addresses an increase in new insurance policies written, while a diminishing demonstrates less policies started. Diminishes in net premiums written could be the consequence of contenders entering the market and taking up market share, or it very well may be on the grounds that premiums are not competitive with what different companies are offering. Companies that offer policies to a bigger pool of individuals might reduce the possibility of declines.
Insurance companies might receive premiums in one payment front and center, however they may likewise offer installment plans to policyholders. Installment plans give the insurance company premiums throughout the span of the year, which are accounted for distinctively while deciding how much revenue the insurance company acquires.
As policyholders utilizing installment plans make payments, a company sorts these as net earned premiums. While deciding an insurance company's tax liability on premiums, a state might permit discounts for premiums that are ceded to reinsurance companies, or premiums that are owed yet not yet received.
Adjusting for liabilities associated with unearned premiums throughout a year is called net premiums unearned. It is a liability since, supposing that the policy is canceled early then the insurer needs to return a portion of the original premium. In the event that a company can compose more premiums throughout the span of the year, its written premiums will surpass its earned premiums.
The Net Premium Calculation
Since the net premium calculation doesn't consider expenses, companies must decide the number of expenses that can be added without causing a loss. Types of expenses that a company must consider incorporate commissions paid to agents who sell the policies, legal expenses associated with settlements, salaries, taxes, clerical expenses, and other general expenses. Commissions commonly fluctuate with the policy's premium, while general and legal expenses may not be tied to the premium.
The calculated difference between net premium and gross premium equals the expected present value of expense loadings (the amount remembered for the premium charged for administrative costs) minus the expected present value of future expenses. Hence, a policy's gross value will be not exactly its net value when the value of future expenses is not exactly the current value of those expense loadings.
Features
- The net premium calculation must think about an estimate for future expenses and remember that for the premiums charged to customers.
- Net premiums written is the sum of premiums written, minus the premiums ceded to reinsurance companies, plus any reinsurance assumed.
- While ascertaining net premiums, an insurance company must account for the difference among earned and unearned premiums.
- The amount of net premiums written reveals insight into how much business an insurance company is doing in a predefined period.
