Net Premiums Written
Categories: Insurance
See: Net Premium.
Doctors have doctors of their own. Lawyers sometimes get in trouble with the law, and need to hire their own lawyer. Barbers need haircuts. Masseuses occasionally get tense. And insurance companies sometimes need insurance of their own. These companies are known as reinsurers.
An insurance company issues a policy to a client. Then it decides that the policy carries more risk than it wants to handle. So it buys a reinsurance policy, offloading some of the risk and splitting its premiums with the reinsurer.
New premiums written represent the amount the insurance company gets to keep, after giving the reinsurance firm its share. The amount stands opposed to gross premiums written, which represent the total value of the premiums, before calculating the reinsurance share. Gross premiums are what a client has to pay...net premiums are what the insurance company keeps.
High Tension Insurance writes a $200 million policy for a company building a space station. The space station company will pay $20 million a year for the policy. Then the CEO for High Tension reads an article about the dangers of sun spots and decides to lay off part of the risk on a reinsurer. The reinsurer agrees to take on 25% of the policy.
Now, if a full claim comes up, High Tension will pay $150 million of the claim (75% of the $200 million). The reinsurer will cover the remaining $50 million. For this help, High Tension will split its premiums with the reinsurer in a 75/25 split. So...High Tension will keep $15 million a year and send $5 million to the reinsurer. The net premium written for that situation is $15 million.
To sum up, the total net premiums written for an insurance company equals the total premiums written, minus the amount it has to send to reinsurance companies. Meanwhile, if the insurance company wrote any reinsurance contracts on its own, those should be added back into the total.
The figure, therefore, registers the amount of money the insurance company gets to keep. It equals the amount it receives, minus the amount it has to send to reinsurers, plus the amount it receives from other insurance companies for reinsurance services rendered.
