Written Premium: Definition & Meaning

KEY TAKEAWAYS

• Written premium is the amount of money that a person has to pay in order to be covered by an insurer.
• Premiums are the main form of income for an insurance business.
• They may be measured as a net or gross figure. 

What Is Written Premium?

Written premium is a term used in insurance and insurance accounting. It is used in the insurance industry to describe the total amount that a customer is required to pay an insurance company for insurance coverage. This is on policies that are given out by an insurance company over a certain period of time.

Written premiums concern the amount of premium that is charged for a policy. But specifically, it’s for a policy that has already come into effect. This is regardless of what portions have already been earned. 

A written premium is the main source of revenue for an insurance company. They will appear on the income statement. Specifically on the top line of the income statement. 

How Written Premium Works

Insurance works by people paying for coverage to protect themselves against financial loss. In return for taking on some of this risk, an insurance company will charge a premium. 

Insurers will sell as many premiums as possible, and then use the profit made from this to pay for any losses and expenses it may incur. The aim is to have enough money left after paying out on coverages to make a profit. 

How Is Written Premium Calculated?

Written premiums are calculated by assessing the risk of the claim. The higher the level of risk, the higher the premium. 

So for example, a person who is looking for life insurance and works day to day in an office environment will have lower premiums than someone who races cars for a living. 

Written Premiums vs Earned Premiums

Earned premiums are the number of premiums that a company records as earnings. This is for providing insurance against a variety of risks throughout the year. An insured policyholder will pay premiums in advance, so these are not immediately considered as profit. 

An insurer can change the status of a premium from unearned to earned when its full obligation is fulfilled. 

Summary

People need to be covered in the case of vast financial loss. And an insurance company needs to make a profit to continue being able to help people in times of need. Written premiums are a good way to cover both people and insurers. 

Without insurance companies, businesses can get into unrecoverable debt. So while it may be possible that a business owner will never need to call upon their insurer, it’s better to be safe than sorry.