Net Premiums Written to Policyholder Surplus (IRIS)
In insurance, a policyholder’s surplus is the remainder of the assets of an insurance company after deducting all of its liabilities to be able to provide the benefits expected to policyholders. It is the insurer’s net worth as shown in its financial statements. It is considered as a financial support to protect the policyholders against unexpected predicaments. Some companies include the following accounts in its policyholder’s surplus:
• Minority interests
• Stockholder’s equity comprising of common stock, other comprehensive income, additional paid in capital (APIC), and retained earnings; in which case the equity must not include minority interests
• An equity substitute, specifically hybrid capital
To compute for policyholder surplus, the total paid in capital, paid in surplus, and contributed surplus, adding in contingency reserves accomplished voluntarily, are added. It can also be computed by subtracting total liabilities from total assets that have been admitted.
A change in policyholder surplus portrays a change in percentage of the previous year’s policyholder surplus, drawn from investment gains, operating earnings, contributed capital at net, and similar other sources.
On the other hand, an insurance premium is the term used in insurance to indicate the price of the insurance protection intended for a particular risk in a given period. Likewise, the term premium balances represents premiums in the course of collecting them, agent’s balances, and booked installments deferred and outstanding, as well as bills receivables that are obtained for plain premiums in addition to retrospective premiums accrued.
Also, premiums earned denote premium sums paid in advance. These premiums are earned in view of the principle of the passage of time without even gaining resultant claims. For instance, a five-year policy paid in advance is considered a partly earned premium on the first year it subsisted. In contrast, premiums unearned are those portions of the premium that is applicable towards the unexpired section of the period of the policy.
Moreover, net premium is the amount obtained by deducting the agent’s commission from the premium amount. It is the premium sum required to cover the losses anticipated before considering to deal with other several expenses. Net premiums earned are the modification of new premiums written with the intention of increasing or decreasing the liability of the company for premiums unearned throughout the year.
An insurance company that increases its business each year will often have earned premiums that are lesser than the premiums written. Having this higher volume, premiums are then viewed as fully paid since the creation of the said policy. This is intended for the company to establish premiums that represent the unexpired provisions of the specified policies. However, net premiums written characterizes gross premiums that are written, direct, and assumed in reinsurance, minus the reinsurance ceded.
A ratio that measures the business’s net retained premiums that are written subsequent to the reinsurance ceded and assumed proportionate to its surplus is called net premiums written to policyholder surplus (IRIS). It indicates how much the company is exposed to errors in pricing in its existing book.