What Are Direct Premiums Written?
Direct premiums written are the total premiums received before considering reinsurance ceded. Direct premiums written represent the growth of a company’s insurance business during a given period. It can include both policies written by the company and policies written by its affiliated companies.
- Direct premiums written are the total premiums received before considering reinsurance ceded.
- Direct premiums written represent the growth of a company’s insurance business during a given period.
- When direct written premiums exceed direct premiums earned a company is said to be experiencing an increase in underwriting volume.
Understanding Direct Premiums Written
An insurance policy is a binding contract between the insured–or customer–and the insurance company–or insurer–whereby the insurer agrees to pay for any losses that are covered within the policy. In return for covering the losses to the insured, the insurance company receives a premium or payment from the customer.
For the insurance company to make a profit, the company needs to collect a greater amount in total premiums as compared to the total amount paid out in insurance claims. Insurance companies can increase revenue by increasing premiums on existing policies that have come up for renewal. However, one of the main drivers of growth for insurance companies comes from the revenue generated from writing new policies. Direct premiums written represents the premiums on all policies that an insurance company and its subsidiaries that have written or issued during the year.
Insurance companies don’t immediately record the premiums paid by customers as earnings. Instead, the premium is considered unearned income since the insurance company still has an obligation to fulfill to the insured, meaning an insurance claim could be filed as long as the policy remains open. Once the coverage has expired, the premiums that were paid can be recorded as earned revenue, which is called direct premiums earned. Direct written premiums, on the other hand, show how many new premiums were written regardless if those premiums have been collected yet.
Direct Written Premiums and Reinsurance
If an insurance company wants to reduce the risk in its portfolio, meaning reduce the risk of claims being paid out, it can cede or offer the policy to another insurance company willing to take on the policy. The company that’s giving the policy is called the ceding company while the company receiving the policy is called a reinsurer. The reinsurer collects the premiums from the customers or policyholders but pays a portion of the revenue back to the ceding insurer–called ceding commissions.
Any premiums earned as a reinsurer are not included in direct written premiums because they do not represent premiums written by the company. Any new insurance policy written is included in the direct written premiums figure since the risk presented by the policy has not yet been passed on to any reinsurance company in exchange for a portion of the policy’s premium.
Direct Premiums Written vs. Gross Premiums Written
When direct written premiums exceed direct premiums earned a company is considered to be experiencing an increase in underwriting volume. The sum of an insurance company’s direct written premiums and its assumed premiums is referred to as gross premiums written. Assumed premiums are the revenue received for policy coverage that’s provided due to a reinsurance agreement. Gross premiums written is the sum of direct premiums written and assumed premiums written prior to the effect of ceded reinsurance is taken into account.
However, gross premiums written does not take into account the company’s risk management strategies and tactics, especially considering its use of ceded reinsurance. Although direct premiums written is before any allowance for premiums that have been ceded to reinsurers, it mainly represents the premiums from policies issued or written during the year.
State taxes that insurance companies owe depends on how many states the insurer operates in. Insurance companies that operate in different states may owe a proportional amount of their direct written premiums, with the proportion equal to the amount of direct written premiums from the state levying taxes divided by the total amount of direct written premiums the company has for all states in which it operates.