What it means
When an insurance company sells a policy, it collects a payment known as a premium. This total initial amount is called gross premiums written.
However, insurance companies rarely take on 100% of the risk themselves. To protect against massive losses, such as a string of major natural disasters, they pass a portion of these policies and their associated payments to other insurers, known as reinsurers.
This practice is called reinsurance, and net premiums written is the crucial figure left over after subtracting these reinsurance costs. For non-finance managers, understanding this term is vital because it shows the true scale of an insurance business.
Gross premiums might look impressive, but they can be misleading if the insurer is simply passing most of that risk and money to other firms. Net premiums written gives a realistic picture of the business volume the company is actively managing and retaining.
This metric serves as the top line for an insurance business, acting much like revenue does for a standard retail or manufacturing company. It is the starting point for calculating underwriting profitability, tracking market share, and assessing growth over time.
Analysts and managers watch this figure closely to see if the company is expanding its active customer base or shrinking its retained risk. Crucially, net premiums written is not the same as earned income.
Insurance companies usually collect payments upfront for a year-long policy. Under accounting rules, they must earn this money gradually over the life of the policy.
Therefore, net premiums written shows what was sold today, while net premiums earned shows what has been recognised as revenue as time passes. Imagine you run a bakery and take a catering order for $1,000, outsourcing $300 of the pastry making to a local baker.
Your net revenue is the $700 you keep, just like net premiums written.
In practice
Real-world examples
Example 1
TechShield Insurance sells $1 million in cyber insurance policies. It pays $200,000 to reinsurers to share the risk. Its net premiums written total $800,000, which is 80% of the business it sold.
Example 2
BuildSafe, a small business insurer, writes $500,000 in contractor policies. It cedes $150,000 to a reinsurer, leaving a net figure of $350,000. The management team uses the retained amount to judge how much capital it needs to hold against possible claims.
Example 3
Metro Fleet, a commercial vehicle insurer, issues $10 million in transport policies. Because fleet risk is high, it reinsures half, resulting in $5 million of net premiums written. Its retained risk is smaller, but so is the premium income it keeps.
Think of it
Imagine you run a bakery and take a massive catering order for one thousand pounds. You outsource the pastry making to a local baker for three hundred pounds, keeping seven hundred pounds of the order for yourself. Your net revenue is seven hundred pounds, just like net premiums written.
Formula
Calculation
Net Premiums Written = Gross Premiums Written - Ceded Premiums (Reinsurance)
Worked example: gross premiums written are $1,200,000 and ceded premiums are $300,000, so net premiums written = $1,200,000 - $300,000 = $900,000.
The share of business kept is $900,000 / $1,200,000 = 75%. Now compare it with earned premium. If every policy is a 12-month policy sold evenly across the year, roughly half of the year's net premiums written is still unearned at year end, so net premiums earned would be about $900,000 x 50% = $450,000 plus whatever was earned from last year's policies.Case study
Seen in the real world
This is a fictional, illustrative scenario. Oakwood Insurance, a mid-sized provider of property and casualty policies, aimed to expand its market presence. During the financial year, the sales team successfully secured $2 million in new policy sales, which formed their gross premiums written. However, management recognised that insuring properties in flood-prone regions carried high potential costs.
To manage this risk safely, Oakwood partnered with a large reinsurance firm, transferring policies worth $600,000 and paying the reinsurer that exact amount. Subtracting the ceded reinsurance from the gross sales left Oakwood with $1.4 million in net premiums written. For the non-finance managers at Oakwood, this metric was central to their operational planning. It proved that the firm was retaining enough business to cover its overhead and staff costs while safely capping its potential payout exposure.
By tracking this figure quarterly, department heads could adjust marketing budgets and ensure they did not take on more risk than their capital reserves could comfortably support. The next year, sales rose to $2.5 million of gross premiums and the reinsurance bill stayed at $600,000, so net premiums written grew to $1.9 million. That was a 36% increase on $1.4 million, compared with a 25% increase in gross sales, which showed that the company was keeping a larger share of its growth.
Watch out
Common mistakes
- Treating net premiums written as actual cash profit instead of top-line revenue.
- Confusing net premiums written with net premiums earned, ignoring the time element of policies.
- Ignoring the cost of reinsurance when looking at total sales figures.
Questions
People also ask
Why do insurance companies buy reinsurance?
Insurers buy reinsurance to protect themselves from catastrophic losses, such as a major hurricane or a wave of claims, by sharing the risk and the associated premium with another company.
Is a higher net premiums written figure always better?
Not necessarily. While growth is positive, high net premiums written can be dangerous if the underlying policies are underpriced and lead to heavy claim payouts later.
How does this differ from net income?
Net premiums written is a revenue measure representing sales after reinsurance. Net income is the bottom-line profit after paying all claims, operating expenses, and taxes.