Written Premium

What Is Written Premium?

Written premium is an accounting term in the insurance industry used to depict the total amount that customers are required to pay for insurance coverage on policies issued by a company during a specific period of time. Written premiums factor in the amount of premium charged for a policy that has previously become effective, paying little heed to which segments have been earned. Written premiums are the principal source of an insurance company's incomes.

How Written Premium Works

Individuals pay for insurance coverage to safeguard themselves against financial loss. For instance, in the event that a policyholder has an auto accident and is insured for it, the insurance company is committed to foot the bill. In exchange for facing this risk, challenges company charges its customers premiums.

Premiums for insurance companies are like sales for retailers. Insurance companies sell however many premiums as would be prudent and afterward utilize the money they create to cover losses and expenses, hopefully with enough left to turn a profit.

Written premiums ascertain the total amount customers consent to pay for insurance policies sold during the accounting period. For instance, assuming an insurance company throughout the span of its fiscal year (FY) sells 1,000 new contracts that require every customer to pay $1,000 in premiums, its written premiums for that period would be $1 million.

Written Premium versus Earned Premium

Written premiums are not the same as premiums earned, which are the amount of premiums that a company books as earnings for giving insurance against different risks during the year. Insured policyholders pay premiums in advance, so insurers don't promptly consider premiums paid for an insurance contract as profit. The insurer can change the situation with the premium from unearned to earned just when its full obligation is satisfied.

Gross Premiums versus Net Premiums

Written premiums might be measured as a gross or net number.

The gross figure doesn't factor in deductions from the commission paid to agents who sell the policies, legal expenses associated with settlements, salaries, taxes, clerical expenses, and reinsurance, which is when insurance companies opt to transfer a portion of their risk to another insurer.

On the other hand, written premiums can be measured as net, a figure that considers associated costs linked to a policy. Net premiums written addresses the amount of the premiums the company will keep for expecting risk. Thusly, taking a gander at changes to net premiums written from one year to another is a valuable method for checking the soundness of insurance companies.

Special Considerations

Written premiums are the principal source of an insurance company's incomes and accordingly show up on the top line of the income statement. The insurance industry is cyclical (alongside the business cycle) and competitive, with various participants fighting for market share essentially on the basis of price.

At the point when there is excess underwriting capacity in the industry, prices are compelled downwards. In the mean time, when there is a shortage of capacity, insurers can exercise a measure of pricing power in premiums.

Features

• They might be measured as a gross or net figure, which shows the amount of the premiums the company will keep for expecting risk.
• Written premium is an accounting term in the insurance industry used to depict the total amount that customers are required to pay for insurance coverage on policies issued by a company during a specific period of time.
• Written premiums are the principal source of an insurance company's incomes and show up on the top line of the income statement.
• Written premiums stand as opposed to earned premiums, which is what an insurance company really books as earnings.