What it means
An insurer sells promises of financial protection, and customers pay premiums for those promises. Add together all the premiums charged on life, motor, property, health and other policies, and you get premium income.
It is to an insurer what sales are to a retailer. There is an important timing issue.
A customer may pay a whole year of premium upfront, but the insurer has only earned the part that relates to the cover already provided. Insurers therefore distinguish between written premium, which is the total premium on policies sold in a period, and earned premium, which is the portion that relates to the time the cover has actually been in force.
Premium income is also reported gross and net. Gross premium is the amount charged to customers, while net premium is what the insurer keeps after paying reinsurers (other insurers who share the risk) their share.
Analysts compare the two to see how much risk the insurer retains for itself. Why does it matter?
Growth in premium income shows whether an insurer is winning new business, but fast growth can also mean it is cutting prices to attract customers. The sensible way to judge it is alongside the combined ratio, which compares claims and expenses with premiums, to see whether the business is profitable.
Insurers also earn investment income by investing the premiums until claims are paid, and this is reported separately. A company can make an underwriting loss, meaning claims and costs exceed premiums, and still produce a profit because of investment returns.
Management and investors want to understand how much comes from each source. In life and health insurance, premium income is often described as new business premium, which comes from newly sold policies, and renewal premium, which comes from existing policies being continued.
A high proportion of renewals suggests stable, loyal customers. That stability is attractive to investors because it is predictable.
In practice
Real-world examples.
Example
A motor insurer collects $50,000,000 in written premiums in a year. Because many policies start midway through the year, only $46,000,000 is recognised as earned in that period. The remaining $4,000,000 is carried forward as unearned premium. It will be recognised as income over the months that cover is still to run, which means the insurer owes those customers protection in return.
Example
A life insurer reports that premium income grew 8%, helped by strong renewals. Analysts note that new business premium was flat, which means growth came mainly from existing customers. The finance team uses the split to set its marketing budget. It decides to spend more on keeping customers than on winning new ones, since renewals cost less to secure.
Example
An investor compares two property insurers. One has higher premium income, but its claims and costs absorb 108% of premiums, while the other absorbs 94%. The investor prefers the smaller insurer because it is profitable on its underwriting. A combined ratio below 100% means that premiums more than cover claims and costs, while one above 100% means the insurer depends on investment returns.
Formula
Calculation
Earned premium = written premium - increase in unearned premium reserve.
An insurer writes $12,000,000 of premiums during the year. Its unearned premium reserve, which covers the part of the cover still to run, rises from $5,000,000 to $5,800,000, an increase of $800,000. Earned premium = $12,000,000 - $800,000 = $11,200,000. If it pays $2,000,000 to reinsurers, its net earned premium is $11,200,000 - $2,000,000 = $9,200,000.Case study
Seen in the real world.
Calder Mutual is a fictional insurer used here for illustration. In one year it cut prices on household policies and saw written premiums jump by 25%.
The finance director then reviewed the combined ratio and found that it had risen from 96% to 107%, because the cheaper policies attracted riskier customers. Premium income was higher but every dollar of premium now generated a loss on underwriting.
The illustrative board reversed part of the discount and tightened its acceptance rules. It learned that premium income is only a good measure of success if the business written is priced profitably.
Watch out
Common mistakes.
- Treating written premium as earned premium. A policy sold today has not yet earned the whole year of income.
- Judging an insurer on premium growth alone. Growth bought with low prices can lead to losses on claims.
- Ignoring reinsurance. Net premium after reinsurance shows how much risk the insurer actually keeps.
Questions
People also ask.
Is premium income the same as profit?
No, it is revenue, and claims, expenses and reinsurance costs must be deducted to find the underwriting result.
Where do I find it in the accounts?
Insurers report written premiums, earned premiums and net premiums in the income statement and the notes. Annual reports usually break the figures down by class of business and by country.
What is a good growth rate?
It depends on the market, but growth well above peers should prompt a check on pricing and claims quality.
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