how written premium works
people pay for insurance coverage to protect themselves against financial loss for example if a policyholder has a car accident and is insured for it the insurance company is obligated to foot the bill in exchange for taking on this risk the company charges its customers premiums premiums for insurance companies are like sales for retailers insurance companies sell as many premiums as possible and then use the money they generate to cover losses and expenses hopefully with enough left to turn a profit written premiums calculate the total amount customers agree to pay for insurance policies sold during the accounting period for example if an insurance company over the course of its fiscal year fy sells 1 000 new contracts that require each customer to pay 1 000 in premiums its written premiums for that period would be 1 million written premium vs earned premiumwritten premiums are different from premiums earned which are the amount of premiums that a company books as earnings for providing insurance against various risks during the year insured policyholders pay premiums in advance so insurers do not immediately consider premiums paid for an insurance contract as profit the insurer can change the status of the premium from unearned to earned only when its full obligation is fulfilled gross premiums vs net premiumswritten premiums may be measured as a gross or net number the gross figure does not 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 some of their risk to another insurer alternatively written premiums can be measured as net a figure that takes into account associated costs linked to a policy net premiums written represents how much of the premiums the company gets to keep for assuming risk as such looking at changes to net premiums written from year to year is a useful way to gauge the health of insurance companies special considerationswritten premiums are the principal source of an insurance company s revenues and thus appear on the top line of the income statement the insurance industry is cyclical along with the business cycle and competitive with numerous participants fighting for market share primarily on the basis of price 