Graphic image of gross written premiums vs. net written premiums

How Insurance Companies Should Use Gross Written Premiums and Net Written Premiums

December 2, 2021 Marisa Iacobucci  
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In accounting terms, written premiums represent the number of premiums sold by an insurance company during a specific period and usually appear at the top of a company’s income statement. Written premiums may be measured as a gross or net number—critical metrics used by insurance companies to track and predict revenue and income. Read on to discover the differences between gross written premiums and net written premiums and learn more about when and why you should use them.

What Are Gross Written Premiums?

Gross written premiums (GWP) are the total premiums an insurer writes during a specific period before deductions for expenses such as ceding and commissions. The calculation for gross written premiums includes all direct and assumed premiums, but not necessarily collected. Instead, gross written premiums include all gross policy premiums to be collected as of the policy issue date, regardless of how and when clients pay for the premiums.

Benefits and Limitations of Gross Written Premiums

As a metric, gross written premiums are a strong indicator of sales volume. For example, the Organization for Economic Co-operation and Development (OECD), an international organization founded to foster global cooperation and economic growth, uses gross written premiums as a measure to assess the contribution of insurance sales to a country’s GDP. At a company level, this metric allows individual insurers to track precisely how much money they are earning from the policies they have sold.

Gross written premiums are also leveraged to determine rates for reinsurance premiums and executive compensation and sales commissions. However, they can also trigger tax implications since in many jurisdictions, insurance companies are taxed based on gross written premiums rather than net written premiums.

While gross written premiums are a good indicator of growth and sales, they don’t accurately represent actual revenue because they don’t account for expenses. For this, companies use net written premiums. They also don’t provide an accurate accounting of what a company has actually earned because they include all potential revenue from premiums and not strictly earned premiums. 

How To Utilize Gross Written Premiums

You can leverage gross written premiums to assess market share, both internally by comparing gross premiums from different types of insurance and externally through comparisons of gross written premiums published by other companies. Tracking this metric also provides a method of monitoring company growth in terms of both volume and market share. Companies will often use gross written premiums in shareholder reports and SEC filings.

Management can use gross written premiums to track productivity by dividing gross written premiums by the total number of insurance employees. Senior management can gain insight into how much revenue employees are producing and whether human capital investments are supported by the number of premiums they are selling.

From a broader perspective, gross written premiums can indicate asset strength for a company. For example, executives can leverage them in conjunction with net written premiums to ascertain risk retention ratios. This ratio reflects the risk management strategy of an insurer and how much of their risk is transferred to reinsurers. Overall, it provides an assessment of a company’s ability to withstand severe risk.

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What Are Net Written Premiums?

Net written premiums are written premiums less deductions for commissions and ceded reinsurance. They measure the dollar amount of the policies underwritten by the insurer, unlike net premiums earned, which are a measure of the actual dollar amount the insurer will receive from premiums sold. They are, however, a strong indicator of potential net premiums earned. As a metric, net written premiums provide insurers and their stakeholders with an accurate picture of the revenue they can expect to retain from the policies they have sold.

Benefits and Limitations of Net Written Premiums 

Net written premiums can help determine the solvency ratio of an insurance company. Positive net written premiums are generally a good indication that an insurer will be able to pay both liability claims from policyholders and reinsurance costs used to mitigate their risks. The greater the net premiums a company has, the more valuable it becomes for its value-pleasing shareholders and for attracting new clients. 

However, it is crucial to understand that a negative net written premium does not always indicate a problem. This can occur due to reinsurance cancellations, reinsurer closures and other events. Due to the timing of reinsurance transactions, a company may have paid off its reinsurance ahead of time, causing a temporary negative net written premium. If there is a negative net written premium, it is vital to understand why and to ascertain whether it is an ongoing or temporary issue. 

How To Utilize Net Written Premiums

In forecasting, companies use net written premiums to gauge potential revenues from policies sold. In turn, these can help management plan for the future in terms of company scalability and employee capacity. They are often an accurate way to evaluate existing policies and practices at an insurance company concerning premium sales and risk mitigation.

Managers can also leverage net premiums written in several ways to inform management decisions. Diving net premiums written by gross premiums written provides what is known as risk retention or reinsurance retention ratio. This ratio provides an approximate measure of how much risk an insurer carries internally rather than passing on to reinsurers. Comparing net premiums to shareholder surplus provides another ratio managers can use to determine whether or not the company is making the right decisions given its access to capital. You can learn more about financial ratios in our dedicated article.

Net premiums written to policyholder surplus is a helpful ratio that insurers use to measure how many losses they can absorb on claims resulting from premiums. Premiums are the way insurers earn income. However, they are not always considered income on the balance sheet. Some are earmarked for payment of benefits and claims while others are not yet earned and may eventually be leveraged as payments for claims. When this ratio is low, it is considered a sign of financial strength. But it could also be a red flag for insurers who may not be charging high enough premiums. A higher ratio suggests a company’s capacity to write new policies is lower or decreasing. It is also a good measure of underwriting volatility and stability. 

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