What is Written Premium?
Written Premium is an accounting term in the insurance industry that refers to the total amount of money that customers are charged for insurance coverage from policies that have been issued and are currently effective within a specific period of time. Think of it as the “main dish” in the insurance restaurant, with several sides of risk on the plate!
Written premiums can be classified as either gross or net figures:
- Gross Written Premium: The total amount before any deductions (just like ordering the whole dessert menu).
- Net Written Premium: The amount that the company retains after commissions, penalties, or fees (because nobody likes hidden charges!).
Remember, while written premiums are what keeps insurers in business, earned premiums represent actual revenue as the coverage period progresses. It’s like paying for an all-you-can-eat buffet, but only getting to enjoy your favorite dish every Tuesday.
Written Premium vs Earned Premium
| Feature | Written Premium | Earned Premium |
|---|---|---|
| Definition | Total amount charged for policies | Portion of the premium earned over time |
| Timing | Not necessarily earned yet | Recognized as revenue over the policy period |
| Type of Revenue | Input revenue | Realized revenue |
| Impact on Financials | Appears on top line of income statement | Appears in the revenue section of the income statement |
| Connection to cash flow | Reflects future cash inflows | Ties to actual cash flow realization |
Examples of Written Premium
-
Insurance Company A sells a million-dollar policy with a monthly premium of $10,000:
- If in April 2023 they issue that policy, their written premium for that month is $10,000.
-
Insurance Company B sells several policies in a quarter:
- If in Q1 they wrote $500,000 worth of policies and their net is $450,000 after deductions, then their written premium is $500,000 ($450,000 retained).
Related Terms
- Earned Premium: The portion of the written premium that an insurance company recognizes as income during the period the policy is in force.
- Gross Premium: The total premium before deductions for things like commissions or taxes.
- Net Premium: The total premium after deductions attributed to the insurance company’s expenses.
Fun Facts and Humorous Insights
- Historical Insight: Insurance has been around since ancient times, with the first known insurance policy recorded in Babylonian times (circa 1750 BC) on clay tablets! 👴📜
- Funny Quote: “Insurance: the only product that both the buyer and the seller hope is never actually used.” 😂
- Fun Fact: Did you know that around 15% of written premiums go to the agents and brokers? So, yes, a piece of that premium directly supports the agent’s piña colada fund!
Frequently Asked Questions
What happens to written premiums when a policy is canceled?
When a policy is canceled, the insurer may return some portion of the written premium, adjusting the net earned premium based on how much coverage has been on the books.
Are written premiums the same as cash received?
Not necessarily. Written premiums reflect the total policies sold in a period, but cash received may be less if some customers are on a payment plan or default.
How do written premiums affect an insurance company’s growth?
More written premiums generally indicate growth; however, insurers need to also manage losses effectively to maintain profitability.
Further Reading & Resources
- Insurance Underwriting Guide
- Books:
- “Insurance Operations” by David A. Rae
- “Fundamentals of Insurance” by J. D. Davis
Take the Plunge: Written Premium Knowledge Quiz
Thank you for diving into the world of Written Premium! Remember: When life gives you premiums, make sure they’re written to keep you covered! 🚀
