Developed to Net Premiums Earned
An insurance company takes foot on the bills if the person is one of their customers who are insured in their insurance policy. In return of this act, the insured should pay for the company’s premiums. These premium rates vary from one company to another and from how broad and how less your insurance policy covers.
An insurance premium maybe collected in monthly or semi-yearly payments. If in case the policy holder won’t be able to pay on the scheduled payment, the insurance company would take their own actions such as canceling the whole policy entirely or letting the policyholder pay the balance of the premium. The insurance brokers or agents will get your basic information on your needs and calculate the insurance based on your answers.
Since premium is amount of money to be paid in an insurance policy to start an early and more comprehensive coverage, it contains different factors included on how high or low the amount of the premium is. These are the net premium and the gross premium.
Inevitable circumstances and risks always comes in a surprise in many different shapes and sizes and most of the time insurance company as much as possible doesn’t want take on certain risks or if possible transfer some of its risk to another insurer also knows as reinsurance. In this case, the insurance company has to pay reinsurance premium rates to the reinsurer. The cost of the reinsurance must be subtracted from the gross premiums and the result of this would come up with the net insurance premium. As net sales are for the retail customer’s business, net premiums are for insurance company’s business.
What is the main difference between the net premium and the gross premium?
The net premium is solely the basic or the original necessary amount that is part of the premium that is enough to cover only anticipated losses excluding other expenses. In contrast the gross premium is the net premium or the original premium plus the operating and miscellaneous expenses including the agent’s commission.
In the accumulation –based accounting, profit and expenses must be matched to the certain period for which they are applicable. This means that when a customer pays you for the first application of the service to be rendered in a year, you won’t be able to realize that profit (and the associated assets) until services are performed. Since insurance contracts are written most often for a longer year periods, the premium earned will be recognized in accumulation basis.
Any lapses on the payment of the premium have its corresponding actions to be made by the insured. Thus in cases like this, most of the time, the insurers get the benefits. The premiums tend to develop to net premiums earned. This is the ratio of developed premiums though the year to net premiums earned. This will also base on the premium growth if it remained relatively steady. This net premium earned ratio will measure whether or not the company’s loss reserves are within pace of with the premium growth.