What it means
When an insurer sells a twelve month policy for $1,200 in December, it writes $1,200 of premium that month even though it has not yet carried a single day of risk. That distinction matters because premium can be written in an instant while the obligation behind it stretches over a year.
The figure is watched closely because it shows growth before it shows up in the profit and loss account. A rise in written premium tells shareholders and regulators that the insurer is winning business now, months before the corresponding earned premium and claims experience appear in reported results.
Two versions are quoted. Gross written premium is everything the insurer has sold, while net written premium subtracts the share passed to reinsurers, and the gap between them shows how much risk the insurer is keeping on its own balance sheet.
Written premium connects to earned premium through the unearned premium reserve, a liability representing cover promised but not yet delivered. Each month a slice of the reserve is released into earned premium, so earned premium equals written premium minus the increase in that reserve.
The main pitfall is reading written premium as if it were revenue. Fast growth in written premium raises the capital an insurer must hold and can mask thin pricing, which is why analysts always pair the growth figure with loss ratios and reserve movements.
In practice
Real-world examples.
Example
A specialist marine insurer reports gross written premium up 22% in a half year after winning a large fleet account. Its earned premium rises only 6% in the same period, because most of the new cover started in the final month of the half.
Example
A pet insurance start up celebrates $18,000,000 of written premium in its second year. Its regulator focuses instead on whether the company holds enough capital to support that volume, since the claims from those policies will land throughout the following twelve months.
Example
A commercial insurer decides to cede more risk and increases reinsurance from 15% to 30% of its book. Gross written premium is unchanged, but net written premium falls sharply, which lowers both the capital it must hold and the profit it keeps if claims come in low.
Think of it
“Written premium is the total sold-all premiums on policies you've issued.
Formula
Calculation
Gross written premium = the sum of premiums on all policies written in the period. Net written premium = gross written premium - reinsurance premium ceded. Earned premium = written premium - increase in the unearned premium reserve.
A motor insurer writes 4,000 annual policies on 1 October, each priced at $1,200. Gross written premium for the quarter = 4,000 x $1,200 = $4,800,000. It cedes $800,000 of that to reinsurers, so net written premium = $4,800,000 - $800,000 = $4,000,000.
By 31 December, three of the twelve months of cover have run, so 3 / 12 = 25% of the gross premium has been earned. Gross earned premium = $4,800,000 x 0.25 = $1,200,000, and the unearned premium reserve carried on the balance sheet is $4,800,000 - $1,200,000 = $3,600,000, which will be released into earnings over the following nine months.Case study
Seen in the real world.
The following is an illustrative and clearly fictional example. Thornbury Mutual, an invented regional insurer, set its sales bonus scheme entirely on gross written premium and told brokers to push hard in the final quarter. Written premium grew 34% year on year and the leadership team briefed its members on a record result.
The reported profit told a duller story. Because most of the new policies incepted in November and December, only a small fraction of the premium had been earned by the year end, while the acquisition commissions had been paid in full and expensed almost immediately.
In the following year the fictional insurer's earned premium caught up, but so did the claims, and the loss ratio on the fourth quarter cohort was eleven points worse than the rest of the book because pricing discipline had slipped in the rush. Thornbury rebased the bonus scheme on net earned premium and underwriting profit, and growth settled at a slower but far more profitable rate.
Watch out
Common mistakes.
- Reading written premium as revenue and comparing it directly with the profit and loss account, where only earned premium appears.
- Comparing one insurer's gross written premium with another's net written premium, which ignores very different levels of reinsurance.
- Assuming written premium growth means profitable growth, when it can simply mean cheaper pricing and a heavier claims bill later.
Questions
People also ask.
What is the difference between written and earned premium?
Written premium is recognised when the policy is sold, while earned premium is recognised day by day as the insurer provides the cover it has promised.
Why do insurers report written premium at all if earned premium is the accounting figure?
Because it is the earliest reliable signal of sales momentum and it drives the capital and reserving the insurer will need over the coming year.
Does cancelling a policy reduce written premium?
Yes, mid term cancellations and refunds are deducted, which is why insurers report written premium net of returns rather than as a simple total of policies sold.
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