Written Premium
Definition
Written premium is the total amount of insurance premium recorded for policies issued by a company during a specific accounting period. It represents the premiums customers are contractually required to pay once a policy becomes effective, regardless of how much of that premium has been earned over time. Written premiums are a primary source of an insurer’s revenue and appear on the top line of the income statement.
How it works
- Customers pay premiums in exchange for the insurer assuming specified risks (e.g., auto collisions, property damage).
- When a policy is issued and becomes effective, the insurer records the full premium as “written” for that period.
- The premium is converted from unearned to earned gradually as the insurer’s obligation is fulfilled over the policy term.
Example: If an insurer issues 1,000 policies during its fiscal year and each policy requires $1,000 of premium, written premiums for that period equal $1,000,000.
Written Premium vs. Earned Premium
- Written premium: total premiums for policies issued in the period (based on contracts).
- Earned premium: portion of written premiums recognized as revenue as coverage is provided over time.
Insurers cannot book premiums as profit immediately; only the earned portion becomes part of reported earnings.
Gross vs. Net Written Premiums
- Gross written premium: total premiums before deductions.
- Net written premium: gross written premium minus ceded reinsurance and other direct deductions (commissions, certain related costs).
Net written premium reflects the amount the insurer retains to assume risk and is often used to assess company performance and growth.
Importance and industry considerations
- Written premiums drive an insurer’s revenue generation and growth metrics.
- The insurance industry is cyclical and competitive; pricing and market share fluctuate with underwriting capacity:
- Excess capacity tends to drive premiums down.
- Limited capacity can give insurers pricing power.
- Monitoring changes in net written premiums helps gauge business health and underwriting trends.
Key takeaways
- Written premium measures the total contractual premium for policies issued in a period.
- It differs from earned premium, which is recognized as revenue over the policy term.
- Net written premium (after reinsurance and deductions) shows the portion of premium the insurer retains to assume risk.
- Trends in written premiums and net written premiums are important indicators of an insurer’s market position and financial performance.