In the insurance industry, a written premium is a term used to refer to the amount of money an insurance company earns from selling policies to customers. It is essentially the total amount of premiums charged to policyholders during a specific period of time, such as a year, for all policies written during that period.
Understanding written premium is important for both insurers and policyholders, as it serves as a key performance indicator for insurance companies and a measure of the financial exposure for policyholders.
How Written Premium Works
Insurance companies generate written premium by selling policies to customers. These policies cover various types of risks, such as property damage, liability, or personal injury. The premium paid by the policyholder is based on a number of factors, including the type and level of coverage, the level of risk associated with the policy, and the deductible.
The total amount of written premium for an insurance company is calculated by adding up all of the premiums charged to policyholders for policies written during a specific period, typically a year. For example, if an insurance company wrote 100 policies during a year and charged an average premium of $1,000 per policy, the company’s written premium for that year would be $100,000.
Written premium is not the same as earned premium, which is the amount of premium an insurance company has earned from policies that have already been in effect for a certain period of time. Earned premium takes into account factors such as cancellations, policyholder refunds, and policy lapses, while written premium only considers the premiums charged during the period in which the policies were written.
Why Written Premium Is Important
Written premium is an important metric for insurance companies, as it helps them to measure their financial performance and growth. Insurers use written premium as a key performance indicator to track how much revenue they are generating from selling policies, and to compare their performance to other insurance companies in the industry.
Written premium is also important for policyholders, as it provides a measure of the insurer’s financial exposure. When a policyholder purchases an insurance policy, they are essentially transferring their risk to the insurer in exchange for a premium payment. The amount of premium paid by the policyholder represents the cost of this risk transfer. By understanding the insurer’s written premium, policyholders can get an idea of the insurer’s overall exposure and financial health.
Written Premium and Underwriting
Written premium is closely linked to the underwriting process in the insurance industry. Underwriting is the process of evaluating the risk associated with a potential policyholder and determining the appropriate premium to charge for the policy. The underwriting process takes into account a variety of factors, including the policyholder’s age, gender, occupation, health, driving record, and other risk factors.
The goal of underwriting is to ensure that the premiums charged by the insurance company are sufficient to cover the potential losses associated with the policy. Insurers use actuarial tables and other statistical models to help them estimate the potential losses associated with each policy, and to determine the appropriate premium to charge.
Once a policy has been underwritten and approved, the insurer will generate written premium by charging the policyholder the agreed-upon premium amount. The written premium reflects the insurer’s estimate of the risk associated with the policy, as well as the insurer’s financial exposure if a claim is made.
Conclusion
Written premium is a key concept in the insurance industry, representing the amount of premiums charged to policyholders during a specific period of time. It is a key performance indicator for insurers and a measure of the financial exposure for policyholders. Understanding written premium is important for both insurers and policyholders, as it helps them to evaluate the insurer’s financial health and exposure to risk. Written premium is closely linked to the underwriting process, which is used by insurers to evaluate the risk associated with potential policyholders
