What it means
When an insurer sells a policy, it agrees to a premium for the cover. Gross written premium is the sum of all those agreed premiums for the policies written in a period, such as a quarter or a year.
The figure counts the full annual premium at the point the policy starts, even though the insurer will provide cover and earn the money gradually over the following twelve months. The word gross is important.
It means the number includes premium that the insurer will pass on to a reinsurer, which is another insurance company that shares the risk, and also the commission paid to brokers. To see what the company actually retains, you subtract the reinsurance premium to arrive at net written premium.
Growth in gross written premium is the main signal of how fast an insurer is expanding. Investors and managers watch it because a rising figure suggests the company is winning customers, raising prices or entering new markets.
However, rapid growth can also mean the company is writing riskier business in a hurry, so the figure must be read alongside profitability measures such as the combined ratio. Written premium is different from earned premium.
Earned premium is the share of written premium that relates to the cover already provided, so a policy written in the final month of the year contributes almost all of its premium to written but very little to earned. Revenue in the accounts follows the earned figure, which is why gross written premium can run ahead of reported income during a period of growth.
Insurers also use the figure for planning. Commission costs, claims reserves and capital requirements all depend on the volume of business written, so management uses it to forecast how much money is needed to support growth.
Regulators look at the same figure when setting minimum capital levels. The nuance is that gross written premium does not tell you whether the business is profitable.
A company can report huge premium volumes and still make losses if claims and expenses consume more than the premiums bring in.
In practice
Real-world examples
Example 1
A motor insurer reports that gross written premium grew 15% to $230,000,000. Analysts ask how much of the growth came from higher prices and how much from extra customers, because only the second kind adds to the claims it must pay.
Example 2
A small specialist insurer writes a single large marine policy with a premium of $4,000,000 and immediately passes 60% of it to reinsurers. Its gross written premium shows $4,000,000, but its net written premium is only $1,600,000.
Example 3
A broker negotiating a renewal sees that the insurer's gross written premium has fallen sharply after it left a loss-making class of business. The broker reads this as a sign the insurer is tightening its underwriting and may be firmer on pricing.
Think of it
Think of Gross Written Premium like a gym membership business recording the total value of all annual contracts signed in January, even though customers pay monthly and use the facilities all year.
Formula
Calculation
Net written premium = gross written premium - premium ceded to reinsurers
Suppose a property insurer writes 20,000 policies at an average premium of $1,500. Gross written premium is 20,000 x 1,500 = $30,000,000. It passes $9,000,000 of this to reinsurers, so net written premium is 30,000,000 - 9,000,000 = $21,000,000. The retention ratio is 21,000,000 / 30,000,000 = 0.70, or 70%, meaning the insurer keeps 70% of the premium it writes.Case study
Seen in the real world
Tidewater Mutual is an illustrative, fictional insurer that set an aggressive target to double its gross written premium in two years. It cut prices on commercial property policies and signed up many new customers, and the headline figure rose by 90%.
Claims then began to arrive at a much higher rate than planned, because the discounted policies attracted riskier buildings. The combined ratio rose above 110%, meaning that every dollar of earned premium cost $1.10 in claims and expenses, and the company had to raise capital to stay within regulatory limits.
The illustrative lesson is that gross written premium is a measure of volume, not quality. Tidewater changed its targets to focus on profit per policy rather than the size of the book.
Watch out
Common mistakes
- Treating gross written premium as revenue, when revenue follows earned premium, which spreads the amount over the period of cover.
- Assuming that high premium growth means the insurer is doing well, when it may reflect underpriced and risky business.
- Forgetting that gross figures include amounts passed to reinsurers, so the insurer's own exposure is lower than the headline suggests.
Questions
People also ask
What is the difference between gross and net written premium?
Gross is the total premium before reinsurance, and net is what is left after the premium ceded to reinsurers is deducted.
Is gross written premium the same as earned premium?
No, written premium counts the full policy premium when the policy is issued, while earned premium counts only the portion for cover already provided.
Does gross written premium include commissions paid to brokers?
Yes, it is measured before commissions are deducted, which are treated as an acquisition cost.