Gross written premium

What Is Gross Written Premium?

Gross written premium (GWP) represents the total amount of premiums that an insurer records before any deductions for reinsurance or other adjustments. It is a fundamental metric in insurance accounting, reflecting the total revenue generated from new and renewed insurance policy sales over a specific period. This figure provides a top-line view of an insurance company's growth and market presence, indicating the volume of business written during the reporting period, regardless of whether the premiums have been fully earned or ceded to other insurers.

History and Origin

The concept of collecting premiums dates back to early forms of risk-sharing. Insurance in some form has existed since ancient societies, with early practices like bottomry contracts in Babylon and maritime loans in ancient Greece involving a form of risk transfer in exchange for a fee. The modern insurance industry, and with it the formalization of premiums, began to take shape significantly after events like the Great Fire of London in 1666, which spurred the development of fire insurance. Over centuries, as insurance became more sophisticated and formalized, companies began to track the total value of the contracts they issued. The gross written premium emerged as a key measure to quantify the total commitment of policyholders to pay for coverage, providing an early indication of an insurer's scale of operations. The historical development of insurance saw the evolution of premium collection from informal agreements to a structured component of financial reporting for insurers.⁴

Key Takeaways

• Gross written premium (GWP) is the total amount of premiums an insurer records before any deductions.
• It signifies the total volume of business an insurance company has written during a period.
• GWP is a crucial indicator of an insurer's market share and growth.
• It does not account for premiums ceded to reinsurers or unearned premiums.
• Analyzing GWP helps evaluate an insurer's sales performance and expansion.

Formula and Calculation

The gross written premium is generally calculated by summing all premiums from newly issued and renewed policies during a specific reporting period, before considering any policy cancellations or premiums ceded to reinsurance companies.

The basic representation is:

For example, if an insurance company writes 100 new policies with an average annual premium of $1,000 and renews 500 existing policies with an average annual premium of $800 in a quarter, the gross written premium for that quarter would be:

This calculation shows the total premium volume before any adjustments for future policy periods or risk transfer.

Interpreting the Gross Written Premium

Gross written premium is a top-line metric that offers insight into an insurance company's sales activity and market penetration. A consistently increasing gross written premium suggests that an insurer is successfully acquiring new clients and retaining existing ones, indicating healthy growth. Conversely, a decline in GWP might signal challenges in sales, increased competition, or a deliberate strategy to reduce risk assessment exposure in certain lines of business.

While GWP is an indicator of market presence, it does not directly reflect profitability. An insurer might have a high GWP but still be unprofitable if its claims, underwriting expenses, and other costs are excessive. Therefore, GWP is often analyzed in conjunction with other metrics such as the loss ratio and expense ratio to gain a comprehensive understanding of an insurer's financial health.

Hypothetical Example

Consider "Horizon Shield Insurance Co." At the beginning of 2024, Horizon Shield decided to focus on expanding its presence in the homeowners' insurance market. Throughout the year, they issued 2,000 new homeowners' policies, each with an average annual premium of $1,200. Additionally, they successfully renewed 8,000 existing policies, with an average annual premium of $1,000.

To calculate their gross written premium for 2024:

1. New Policies: 2,000 policies * $1,200/policy = $2,400,000
2. Renewed Policies: 8,000 policies * $1,000/policy = $8,000,000

Total Gross Written Premium for 2024 = $2,400,000 + $8,000,000 = $10,400,000

This $10.4 million represents the total premium volume written by Horizon Shield before considering any portion that might be unearned (i.e., for coverage periods extending into 2025) or ceded to a reinsurance partner to mitigate large risks. It provides a clear picture of the company's sales efforts and overall premium generation during the year.

Practical Applications

Gross written premium is a crucial metric for various stakeholders in the financial world:

• Investors and Analysts: They use GWP to gauge an insurer's market share, growth trajectory, and competitive standing. A rising GWP can signal increasing revenue potential, although it must be balanced against an insurer's solvency and profitability. Financial analysts often compare GWP trends across different insurance companies to assess industry performance.
• Company Management: For internal management, GWP helps in evaluating sales performance, setting targets, and assessing the effectiveness of underwriting strategies. It's a key input for business planning and resource allocation.
• Regulators: Regulatory bodies, such as the U.S. Securities and Exchange Commission (SEC), monitor GWP as part of their oversight to ensure market stability and protect policyholders. The SEC's Division of Corporation Finance oversees the financial disclosures of public companies, including insurers, to ensure transparency.³
• Rating Agencies: Credit rating agencies like A.M. Best consider GWP as an important factor when assessing an insurer's financial strength and creditworthiness. They analyze growth in GWP alongside other metrics to form their opinions on an insurer's capacity to meet its obligations. Briefings by organizations like A.M. Best frequently discuss current reinsurance market trends, which are directly influenced by global premium volumes.²
• Industry Economists: Organizations like the Swiss Re Institute track global non-life and life global non-life premiums as key indicators of the overall health and growth of the insurance sector, often highlighting trends related to economic conditions and emerging risks.¹

Limitations and Criticisms

While gross written premium provides valuable insights into an insurer's top-line growth, it has several limitations:

• No Indication of Profitability: GWP alone does not tell whether the premiums are profitable. An insurer could write a large volume of premiums for policies that eventually incur significant claims, leading to losses. To assess profitability, GWP must be evaluated alongside incurred losses and expenses through metrics like the combined ratio.
• Impact of Reinsurance: GWP does not account for the portion of premiums ceded to reinsurers. Ceding premiums to reinsurance reduces an insurer's exposure to large claims but also lowers the net premium retained. This distinction is critical for understanding the actual risk retained by the primary insurer.
• Timing Differences (Unearned Premiums): GWP includes premiums for coverage periods that extend beyond the reporting period. These unearned premiums are a liability on the balance sheet and are only recognized as revenue over time. This timing difference means GWP is not synonymous with earned revenue in the income statement.
• Cancellations and Lapses: GWP does not immediately reflect policy cancellations or lapses that may occur after the premium is written. While insurers typically account for these through adjustments, the initial GWP figure can overstate the actual business retained.

Gross Written Premium vs. Net Earned Premium

Gross written premium (GWP) and net earned premium are two distinct, yet related, metrics vital for understanding an insurance company's financial performance.

While GWP measures the total value of new and renewed contracts, net earned premium represents the portion of those premiums that the insurer has actually "earned" for providing coverage during the reporting period, after accounting for premiums ceded to reinsurers and adjusting for unearned premiums from previous periods.

FAQs

What is the difference between gross written premium and gross earned premium?

Gross written premium is the total premium from new and renewed policies, regardless of whether the coverage period has passed. Gross earned premium, on the other hand, is the portion of gross written premium (plus or minus any unearned premiums from the prior or current period) for which the insurer has provided coverage during the reporting period.

Why is gross written premium important for an insurance company?

Gross written premium is important because it indicates the volume of new business an insurer is generating and its overall market presence. It is a key metric for assessing sales growth and market share, and it forms the basis for future earned premiums and investment income, which are critical for an insurer's long-term viability and ability to maintain adequate reserves.

How does reinsurance affect gross written premium?

Reinsurance does not directly affect gross written premium, as GWP is recorded before any premiums are ceded to reinsurers. However, for a primary insurer, the portion of GWP that is then transferred to a reinsurer is accounted for as a "reinsurance premium ceded," which reduces the net written premium and, subsequently, the net earned premium that the primary insurer retains.

Is a high gross written premium always a good sign?

Not necessarily. While a high gross written premium indicates strong sales and market growth, it does not guarantee profitability. An insurer might write a large volume of premiums by taking on excessive risk assessment or by pricing policies too low, which could lead to substantial claims and underwriting losses. It must be assessed in conjunction with other metrics like the combined ratio and the quality of the underwriting portfolio.

Where can I find an insurance company's gross written premium?

Gross written premium figures are typically reported in an insurance company's regulatory filings and financial statements, such as annual reports (Form 10-K for public companies in the U.S.) and quarterly reports (Form 10-Q). These documents are usually available on the company's investor relations website or through the SEC's EDGAR database.