Written Premium in Insurance: Key Financial Indicator Explained

A detailed examination of written premiums in the insurance industry, covering their definition, calculation, importance, and comparison with other premium types.

A written premium refers to the total amount that customers are obligated to pay for their insurance coverage over a specified period. This figure is crucial for insurance companies as it represents the revenue earned before paying any claims or expenses. Written premiums are recorded when a policy is issued, regardless of when the premium is actually received.

Calculation of Written Premium

The calculation of written premiums is straightforward: it involves summing the total premiums agreed upon in insurance policies within a specific period. The formula can be expressed as:

$$ \text{Written Premium} = \sum_{i=1}^{n} \text{Premium Amount for Policy}_i $$

where \(n\) is the number of policies written during the accounting period.

Types of Premiums in Insurance

• Written Premium: The total premiums on all policies issued during the period.
• Earned Premium: The portion of written premiums that corresponds to the expired part of the risk.
• Unearned Premium: The portion of written premiums that remains for the unexpired part of the risk.

Examples and Application

Example 1: If an insurance company writes 100 policies in a month and each policy has an annual premium of $1,000, the written premium for that month is:

$$ 100 \text{ policies} \times \$1,000 = \$100,000 $$

Historical Context

The concept of written premiums has been a fundamental accounting metric in the insurance industry for decades. It allows companies to measure their financial performance and generate reserves for future claims.

Importance in Financial Analysis

Written premiums are used to assess an insurer’s revenue generation potential. Higher written premiums indicate stronger business performance and growth potential. However, it’s important to analyze them along with loss ratios and expense ratios for a comprehensive financial assessment.

FAQs

Q: How do written premiums differ from earned premiums? A: Written premiums are the total premiums scheduled to be received from policies issued during a period, while earned premiums are the portions of the premiums that have been recognized based on the passage of time.

Q: Why are written premiums important in insurance accounting? A: They signify the revenue an insurance company expects to receive and form the basis for financial planning and reporting.

Related Terms

• Loss Ratio: A measure comparing claims paid to earned premiums.
• Combined Ratio: A measure indicating the overall profitability, combining the loss ratio and expense ratio.

References

1. Insurance Information Institute. (2023). Glossary of Insurance Terms.
2. National Association of Insurance Commissioners (NAIC). (2023). Accounting Practices and Procedures.

Summary

Written premiums are a fundamental indicator of financial health and business activity in the insurance industry. They represent the total revenues expected from insurance policies issued during a specific period, offering insights into an insurer’s revenue generation capability and helping in strategic financial planning.