What it means
In the insurance industry, Gross Premiums Written represents the total volume of business generated. When a customer buys a policy and agrees to pay a monthly or annual fee, that entire contracted amount counts as written premium.
This metric is vital because it shows how effectively a company is marketing its products, winning new clients, and growing its market share. It gives managers an immediate sense of top-line sales performance.
However, it is important to remember that this figure does not equal actual cash in the bank or recognised revenue. Since policies often cover future periods, insurance companies must spread the earnings over time.
This process is known as earning the premium. Furthermore, insurance firms usually pass a portion of their risk and money to other companies, called reinsurers, to protect against massive losses.
Because of this, managers also look at Net Premiums Written, which is the gross amount minus the cost of reinsurance. While gross figures highlight total sales muscle, net figures show the real business retained.
Tracking both helps leaders balance ambitious sales targets with sensible risk management, ensuring the company does not take on more exposure than it can safely handle. Imagine running a bakery that takes advance orders for birthday cakes.
The total value of all the cake orders placed today is your gross premium written, even before you bake the cakes or spend the money.
In practice
Real-world examples
Example 1
TechShield Insurance sells cyber liability policies to start-ups, securing 500 new annual contracts worth $1,000 each, resulting in $500,000 of gross premiums written. The sales director reports this figure to the board as the headline measure of the year's growth. The finance team then works out how much has actually been earned so far.
Example 2
BrightFleet Logistics insures its delivery vans through a commercial provider, paying an annual premium of $12,000 upfront, which is recorded as gross premiums written by the insurer. For BrightFleet it is simply an operating expense, but for the insurer it is a sale. The insurer will recognise it as revenue gradually over the twelve months.
Example 3
SafeHome Mutual underwrites property insurance for homeowners across the region, generating $2,000,000 in gross premiums written during the third quarter across all active policies. Management compares this with the same quarter last year to judge sales growth. It also checks how much of the amount has been passed to reinsurers.
Think of it
Imagine running a bakery that takes advance orders for birthday cakes. The total value of all the cake orders placed today is your gross premium written, even before you bake the cakes or spend the money.
Formula
Calculation
Gross Premiums Written = Total Value of All Insurance Policies Issued and Renewed During a Period. Net Premiums Written = Gross Premiums Written - Premiums Passed to Reinsurers.
Worked example 1. An insurer issues 1,000 policies at $600 each.
- 1,000 policies x $600 = $600,000 Gross Premiums Written
Worked example 2. The insurer passes $150,000 of that premium to a reinsurer (a company that takes on part of the insurer's risk).
- Net Premiums Written = $600,000 - $150,000 = $450,000
Worked example 3. One $1,200 annual policy starts on 1 October. By 31 December, three of the twelve months have passed.
- Earned premium = $1,200 x 3 / 12 = $300
- Unearned premium = $1,200 - $300 = $900
The full $1,200 counts as written premium on the day the policy starts, but only $300 has been earned by the year end.Case study
Seen in the real world
This is a fictional, illustrative scenario. Oakwood Property Insurance experienced a busy year expanding its regional coverage. By the end of the financial year, the sales team had successfully signed up new clients and renewed existing ones, bringing in a total of $5,000,000 in gross premiums written. To the marketing director, this top-line growth looked impressive and proved the new advertising campaign was working. However, the chief financial officer urged caution.
Oakwood had handed off $2,000,000 of that premium to a reinsurance firm to protect against potential storm damage, meaning the net premiums written were actually $3,000,000. Furthermore, much of the $5,000,000 applied to policies spanning into the next year, meaning actual earned revenue was lower for the current period. The CFO showed that $1,500,000 of the gross figure related to cover that would only be provided in the following year, so just $3,500,000 had been earned in the current year before reinsurance. By understanding the difference between top-line sales and earned revenue, Oakwood managed its cash flow carefully and avoided overspending on expansion.
Watch out
Common mistakes
- Treating Gross Premiums Written as immediate cash profit available to spend.
- Confusing written premiums with earned premiums, which are recognised over time as the insurance service is actually delivered.
- Ignoring the impact of reinsurance, which reduces the actual risk and revenue kept by the primary insurer.
Questions
People also ask
Is Gross Premiums Written the same as revenue?
Not quite. While it represents total sales, insurance revenue is earned progressively over the lifespan of the policy, not all at once when the policy is signed.
Why do insurance companies track gross figures if they share risk?
Gross figures show total market presence and sales capacity. They provide a baseline before adjusting for reinsurance and earned time frames.
How does this metric affect daily business decisions?
It helps managers gauge sales team performance, set growth targets, and determine how much capital needs to be set aside to cover potential claims.