Gross premiums written

What Is Gross Premiums Written?

Gross premiums written (GPW) represents the total amount of premium that an insurance company has committed to collect from policyholders during a specific reporting period, before accounting for any premiums ceded to reinsurers or other deductions. It serves as a key indicator within insurance accounting, reflecting the top-line revenue and overall sales volume for an insurer's underwriting activities. This figure includes premiums from newly issued policies as well as renewals, signifying the insurer's total exposure to risk before any risk transfer mechanisms are applied.²⁵, ²⁶

History and Origin

The concept of tracking premiums dates back to the earliest forms of insurance, which emerged to manage risks associated with maritime trade in ancient civilizations. As the insurance industry evolved from informal agreements to formalized companies, the need for standardized financial reporting became paramount to ensure solvency and protect policyholders. In the United States, insurance regulation historically developed at the state level. A significant turning point arrived with the McCarran-Ferguson Act of 1945, which largely affirmed states' authority to regulate the business of insurance, thereby influencing the reporting standards for metrics like gross premiums written.²², ²³, ²⁴ The establishment of state insurance departments and coordinating bodies like the National Association of Insurance Commissioners (NAIC) further standardized how insurance companies account for and report their premiums, allowing for consistent measurement of business volume across the industry.²¹

Key Takeaways

Gross premiums written (GPW) is the total amount of premiums an insurer commits to collect from policyholders before deductions like reinsurance.²⁰
It signifies the overall sales volume and market presence of an insurance company.¹⁸, ¹⁹
GPW is a crucial metric for assessing an insurer's growth and capacity for underwriting new business.¹⁶, ¹⁷
This figure does not account for the costs of doing business or the portion of risk transferred to other insurers.

Formula and Calculation

Gross premiums written is not typically calculated using a complex formula, but rather represents an aggregation of all premiums associated with policies issued or renewed during a given period. It is the sum of direct premiums written (premiums from policies the company issued directly) and assumed premiums written (premiums from policies where the company acts as a reinsurer), before any amounts are deducted for reinsurance ceded to other companies.

\text{Gross Premiums Written} = \sum (\text{Premium for each new or renewed policy})

Alternatively:

\text{Gross Premiums Written} = \text{Direct Premiums Written} + \text{Assumed Premiums Written}

Where:

Direct Premiums Written: The total premium from policies issued directly to a policyholder.
Assumed Premiums Written: The total premium accepted by an insurer from another insurer as part of a reinsurance arrangement.

Interpreting Gross Premiums Written

Interpreting gross premiums written involves understanding its role as a key indicator of an insurance company's market activity and growth. A rising gross premiums written figure generally indicates that the insurer is expanding its operations, gaining market share, or increasing its pricing for underwriting new policies. It reflects the company's ability to attract new policyholders and retain existing ones.

However, a large gross premiums written figure alone does not guarantee profitability or financial health. It must be assessed in conjunction with other metrics, particularly those related to claims and expenses, and the insurer's overall risk management strategy. For instance, aggressive growth in gross premiums written without sound underwriting practices could lead to higher losses down the line.

Hypothetical Example

Consider "Horizon Insurance Co." for the fiscal year ending December 31, 2024.

Horizon Insurance Co. offers various types of coverage:

Auto Insurance: Issued 10,000 new policies at an average annual premium of $1,200 each. Renewed 50,000 policies at an average annual premium of $1,100 each.
Home Insurance: Issued 2,000 new policies at an average annual premium of $2,000 each. Renewed 15,000 policies at an average annual premium of $1,900 each.
Commercial Property Insurance (Assumed Reinsurance): Accepted $5,000,000 in premiums from other insurers for reinsurance coverage.

To calculate Horizon Insurance Co.'s gross premiums written:

Auto New Policies: (10,000 \text{ policies} \times $1,200/\text{policy} = $12,000,000)
Auto Renewals: (50,000 \text{ policies} \times $1,100/\text{policy} = $55,000,000)
Home New Policies: (2,000 \text{ policies} \times $2,000/\text{policy} = $4,000,000)
Home Renewals: (15,000 \text{ policies} \times $1,900/\text{policy} = $28,500,000)
Assumed Reinsurance: ($5,000,000)

\text{Total Gross Premiums Written} = \$12,000,000 + \$55,000,000 + \$4,000,000 + \$28,500,000 + \$5,000,000 = \$104,500,000

Horizon Insurance Co. would report $104,500,000 as its gross premiums written for the fiscal year. This figure would appear on the company's income statement and contribute to the balance sheet through related assets and liabilities.

Practical Applications

Gross premiums written is a fundamental metric with several practical applications in the financial world:

Market Share Assessment: Investors and analysts use gross premiums written to gauge an insurer's market penetration and its position relative to competitors. A consistently high or growing GPW suggests a strong market presence and successful sales efforts.¹⁵
Growth Indicator: It serves as a primary indicator of an insurance company's growth trajectory. Significant increases in gross premiums written can signal expanding operations or effective pricing strategies.¹⁴
Capacity Planning: Insurers use GPW to assess their underwriting capacity and determine if they need to adjust their solvency capital or explore further reinsurance arrangements to manage increased risk exposure.
Regulatory Oversight: Regulatory bodies closely monitor gross premiums written to ensure that insurers maintain adequate financial reserves to cover potential claims against their total underwritten business. This helps protect policyholders.
Financial Reporting: Gross premiums written is a prominently disclosed figure in the financial statements of insurance companies, providing transparency to investors and stakeholders. For example, major insurers like Berkshire Hathaway Inc. report their gross premiums written in their annual filings with the Securities and Exchange Commission, illustrating the scale of their insurance operations.¹³ The broader significance of the insurance sector's scale, as partly represented by gross premiums written, is often highlighted in global financial assessments, such as those provided in the International Monetary Fund's Global Financial Stability Report.

Limitations and Criticisms

While gross premiums written offers valuable insights into an insurer's top-line growth and market activity, it has several limitations:

No Profitability Indication: Gross premiums written is a measure of sales volume, not profitability. It does not account for the costs associated with generating those premiums, such as acquisition costs, claims paid, or operating expenses. An insurer could have high gross premiums written but still be unprofitable if its loss ratio or expense ratio is too high.¹²
Excludes Reinsurance Cessions: By definition, gross premiums written does not deduct the portion of premiums ceded to reinsurance companies. This means it overstates the actual risk retained by the insurer. A company heavily reliant on reinsurance to manage its risk may appear to be writing a significant amount of business, but a substantial portion of that risk and its associated premiums have been transferred to other insurers.
Timing Differences: Gross premiums written are recorded when policies are issued, regardless of when the cash is received or when the coverage period begins. This can create a disconnect between the reported premium volume and the actual cash flow or earned revenue for a given period.¹⁰, ¹¹
Impact of Accounting Standards: Changes in accounting standards, such as the adoption of IFRS 17, can alter how premiums are recognized and presented, potentially affecting the comparability of gross premiums written across different periods or companies.⁸, ⁹
Systemic Risk Concerns: From a broader economic perspective, the sheer volume of gross premiums written within the insurance industry can also be a point of analysis concerning systemic financial stability. As highlighted in research papers like " Insurers and the Financial System" from the Federal Reserve Bank of San Francisco, the interconnectedness and scale of insurers can pose broader financial risks, which are underpinned by the volume of business they underwrite.

Gross Premiums Written vs. Net Premiums Written

The distinction between gross premiums written (GPW) and net premiums written (NPW) is crucial in understanding an insurance company's financial health and its approach to risk management.

Gross Premiums Written represents the total value of all premiums that an insurer has committed to collect during a specific period, before any deductions. It includes direct premiums from policies sold to customers and assumed premiums from reinsurance arrangements, reflecting the raw volume of business underwritten.⁷

In contrast, Net Premiums Written is derived by taking the gross premiums written and subtracting the premiums paid to reinsurers for coverage (known as ceded premiums). This figure indicates the amount of premium that the insurer retains for itself after transferring a portion of its risk to other insurers.

The key difference lies in the treatment of reinsurance. GPW reflects the total business generated, while NPW shows the business the company effectively keeps and assumes the risk for. A higher proportion of NPW relative to GPW suggests that the insurer is retaining more risk and thus aiming for a larger share of potential profits (or losses) from the policies it writes.

FAQs

Q: What is the primary purpose of gross premiums written?
A: The primary purpose of gross premiums written is to indicate the total sales volume and market presence of an insurance company for a specific period, before considering any risk transfer through reinsurance.⁵, ⁶

Q: How does gross premiums written relate to an insurance company's profitability?
A: Gross premiums written is a measure of revenue volume, not profitability. While a higher GPW can indicate growth, it does not account for the costs of claims, operations, or ceded premiums. To assess profitability, analysts examine metrics like the loss ratio, expense ratio, and combined ratio.⁴

Q: Is gross premiums written the same as premiums earned?
A: No, gross premiums written is not the same as premiums earned. Gross premiums written refers to the total premiums for policies issued during a period, regardless of when the coverage is provided or the cash is received. Premiums earned, on the other hand, represent the portion of written premiums that an insurer has actually recognized as revenue for coverage provided over a specific period.², ³

Q: Why is reinsurance important when looking at gross premiums written?
A: Reinsurance is important because it highlights that gross premiums written does not reflect the actual risk retained by the insurer. A significant portion of the risk (and associated premiums) shown in GPW may have been transferred to other companies through reinsurance arrangements, impacting the insurer's true exposure and financial stability.¹