Jane Dotson
The insurance sector uses a variety of methods to determine the rates for insurance premiums. These rates are calculated based on past experiences, industry-wide data, and statistical analysis. The gross premium is the total amount paid by the insured for an insurance policy and includes expenses such as commissions for brokers and selling expenses. The calculation of the gross premium rate involves determining the pure premium, which covers losses and loss-related expenses, and then adding loading charges, which cover additional expenses and profit. The gross rate is the sum of the pure premium and the loading per exposure unit, and it is expressed as a percentage increase over the pure premium. This rate is then multiplied by the number of exposure units to be insured to arrive at the gross premium. Gross premiums are important for insurance companies to understand their revenue, tax implications, and market share.
| Characteristics | Values |
|---|---|
| Gross Premium | The total amount paid by the insured for an insurance policy, including commissions, selling expenses, and other insurer expenses |
| Net Premium | The actual amount the insurer receives from the policyholder after accounting for expenses; it reflects the insurer's profitability |
| Gross Rate | The pure premium plus the loading per exposure unit; it is expressed as a percentage increase over the pure premium |
| Pure Premium | Determined by actuarial studies, it is the part of the premium necessary to pay for losses and loss-related expenses |
| Loading | The part of the premium that covers other expenses (e.g., sales expenses) and allows for a profit; it is often expressed as a proportion of the premium |
| Gross Net Written Premium Income (GNWPI) | A measure of an insurer's performance, calculated using written premiums, which considers the risk ceded to a reinsurer |
| Manual Rate | A uniform rate applied to a predetermined class or group, such as people of the same age or drivers with specific characteristics |
| Merit Rate | An individual rate based on personal factors and risk assessment |
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What You'll Learn
Gross premium for life insurance
The gross premium for life insurance is the total amount paid by the insured for an insurance policy. It is important to note that the gross premium is not the amount that the insurance company earns from writing the policy. The gross premium includes the premium to cover the death claim, plus all expenses, a reserve for contingencies, and profit.
The gross premium is adjusted upwards to account for commissions, selling expenses, and other insurer expenses. Commissions are typically paid to intermediaries, such as brokers or agents, as a percentage of the gross premium paid by the client. The gross premium is essential for insurance companies as it helps them understand their revenue generation from their policies.
The pure premium, which is determined by actuarial studies, is the part of the premium required to pay for losses and loss-related expenses. Loading, on the other hand, is the component of the premium that covers other expenses, particularly sales expenses, and enables a profit. The gross rate is the sum of the pure premium and the loading per exposure unit, and the gross premium is the gross rate multiplied by the number of exposure units insured.
In life insurance, the rate is generally more than adequate to cover all reasonably anticipated losses and expenses. As a result, the insured is often charged an excessive premium, a portion of which is returned as a dividend based on actual losses and expenses.
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Pure premium and loading
Pure premium is the portion of an insurance premium that covers expected losses and loss-related expenses. It does not include any administrative expenses, agent commissions, or profit margins. In other words, it is the sum of losses and loss-adjusted expenses over a given period, divided by the number of exposure units. Pure premiums are determined by actuarial studies and can vary based on the type of insurance and associated risks.
Loading, on the other hand, is the part of the premium that covers other expenses, such as sales and administrative costs, and allows for profit. It is the additional charge or fee imposed on the regular premium paid by the policyholder. Loading charges are often expressed as a proportion of premiums, and they increase proportionately with the premium, especially for commissions and premium taxes. The ratio of the loading charge over the gross rate is called the expense ratio.
The gross rate is the pure premium plus the loading per exposure unit. The gross premium is the premium charged to the insurance applicant and is calculated by multiplying the gross rate by the number of exposure units to be insured. The gross premium includes the premium to cover claims, all expenses, a reserve for contingencies, and profit. It is the total amount paid by the insured for an insurance policy and helps insurance companies understand their revenue.
Insurance companies calculate the premium load based on various risk factors, such as the risk associated with the insured individual, the type of coverage, and potential claims experience. Premium loads can be applied as a percentage or a fixed amount, depending on the insurance company's policies and specific coverage.
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Gross written premiums
However, gross written premiums do not accurately represent actual revenue because they do not account for expenses. For this reason, net written premiums are also used. Net premiums written are gross written premiums less ceded written premium. They give an indication of the level of sales for risks that the company retains for itself. Although a positive net premiums written suggests that an insurance company is financially sound, a negative net premiums written does not necessarily mean that the company is insolvent and incapable of providing the promised benefits.
In many jurisdictions, insurance companies are taxed based on gross written premiums rather than net written premiums.
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Gross net written premium income
GNWPI is the total premiums an insurance company writes during a specific period, usually a year, less the premiums it cedes to reinsurance. It represents the insurer's base revenue from underwriting activities. GNWPI is of paramount importance as it indicates an insurer's capacity to underwrite risk and its financial health.
GNWPI is also used to calculate the net written premium. The formula is: Net Written Premium = Gross Written Premium – Cost of Reinsurance. The gross written premium is the premium charged to the insurance applicant, and equals the gross rate multiplied by the number of exposure units to be insured.
While GNWPI is a good indicator of an insurer's financial health, it does not consider earnings on investments such as equities or bonds, nor does it take into account any assets that the insurer has. Therefore, it cannot be relied on solely to ascertain an insurer's financial health.
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Net premium
The net premium of a policy does not consider future expenses and is sometimes called a benefits premium. Net premium also helps to determine the amount of state taxes owed by insurance companies. State premium taxes increase the price of insurance products, resulting in a decrease in demand. Insurance companies may be allowed to add back unearned premiums and expenses to lower the gross premium, thus reducing the taxes payable.
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Frequently asked questions
The gross premium is the total amount paid by the insured for an insurance policy, including commissions for brokers and other selling expenses.
The gross rate is the pure premium plus the loading per exposure unit. The pure premium is the part of the premium needed to pay for losses and loss-related expenses. Loading covers other expenses, especially sales expenses, and allows for a profit.
Gross written premiums are a strong indicator of sales volume and can be used to assess market share and monitor company growth. They are also used in shareholder reports and SEC filings.
GNWPI is the amount of an insurance company's premiums that are used to determine the amount of premiums owed to a reinsurer. It is calculated using either earned or written premiums.
