Net Premiums Written
Net premiums written is the sum of all types of insurance premiums which a company may collect throughout the whole duration of existing insurance policies minus the costs or payments made for reinsurance. It takes part of an insurance company’s accounts receivable in calculating its combined ratio. The insurer’s combined ratio depicts how it efficiently handles the liability claims from the consumers.
Reinsurance is the insurance company’s protection to different risks or losses. Insurance providers typically provide themselves with their own reinsurers in order to be financially protected. A portion of the premiums paid by the consumers to their insurance providers are also being paid to the reinsurer. The costs for reinsurance are deducted to the gross premiums written which results to net premiums written. The latter is used by insurance companies to measure the amount of premiums on hand or retained after the cession for reinsurance.
The greater the net premiums written the company possesses, the more valuable it becomes in terms of premium generating ability. An insurance company which generates income or is highly profitable attracts many consumers because it demonstrates a good financial standing necessary to provide the payouts promised in the policy contract. If an insurance company has a large number of policyholders, it naturally means that there are sufficient premiums to cover losses and other costs. It can be presumed that the insurer has the capability to continually pay reinsurance premiums and be covered by reinsurers. Reinsurers, although they have other means of gaining profits, get the funds from the premiums which insurance providers pay. These funds will in return compensate the insurance company for financial losses. Net premiums written are also one of the bases in determining how solvent the insurance company is. If the insurance company produces positive net premiums written, it shows that the insurer can pretty much pay the reinsurance costs as well as the liability claims that may be filed by the policyholders.
Although there is a presumption that an insurance company is financially sound when it possesses a positive net premiums written, it is also important to remember that having a negative net premiums doesn’t mean that the company is insolvent and is not capable of providing the benefits promised. The nature and timing of reinsurance transactions can have a negative impact on the net premiums written. There are cases when the net premiums written temporarily falls negative resulting from other factors which are present in the process of transactions. Negative net premiums arises when a certain reinsurance agreement is canceled, the company discontinued operations or other uncommon events. However, if the company’s net premiums written fall negative it doesn’t necessarily mean that the policyholders are likely to suffer losses from benefits which the insurer promised. Negative net written premiums can be temporary and may mean that the insurance provider has already secured or paid its reinsurance ahead of time including coverage for future losses. This demonstrates that an insurance company is financially capable of providing payouts which it is bound to give to the consumers.