Key Takeaways
- Net Premiums Written equals premiums retained after reinsurance.
- Subtract premiums ceded to reinsurers from gross premiums.
- Indicates insurer's retained underwriting risk and revenue.
- Used to assess financial performance and risk exposure.
What is Net Premiums Written?
Net Premiums Written (NWP) is the total amount of premiums an insurance company retains after deducting premiums ceded to reinsurers from its Gross Written Premium (GWP). This metric reflects the insurer’s actual underwriting exposure and revenue retention over a given period.
NWP differs from the Net Premiums Earned, which accounts for the portion of premiums recognized as income during the policy term, making NWP a crucial starting point for underwriting analysis.
Key Characteristics
Net Premiums Written captures the insurer’s retained risk and revenue after reinsurance adjustments. Key features include:
- Calculation: NWP equals Gross Written Premium minus premiums ceded to reinsurers, including facultative and obligatory reinsurance.
- Risk Exposure: Indicates the volume of risk the insurer keeps on its books, excluding transferred risks.
- Revenue Indicator: Serves as a key metric for revenue forecasting and evaluating underwriting performance.
- Financial Reporting: Appears in insurance company financial statements alongside related metrics like GWP and earned premiums.
- Reinsurance Impact: Reflects the role of reinsurance contracts, including facultative reinsurance, in managing risk.
How It Works
Net Premiums Written is derived by subtracting the premiums paid to reinsurers from the total premiums written by the insurer. This deduction accounts for risk transferred through reinsurance agreements, reducing the insurer’s net exposure.
For example, if an insurer writes $100 million in gross premiums but cedes $30 million to reinsurers, its NWP is $70 million. This retained premium reflects the insurer’s commitment to covering claims and influences solvency and capital planning, often tracked alongside tools like a T-account for accounting clarity.
Examples and Use Cases
Understanding Net Premiums Written helps stakeholders analyze insurer performance and risk management strategies. Examples include:
- Health Insurance: UnitedHealth Group monitors NWP to assess its exposure after reinsurance and optimize underwriting profitability.
- Life Insurance: Prudential Financial uses NWP to evaluate premium retention and growth in its life insurance segment.
- Regulatory Analysis: The NAIC requires insurers to report NWP figures to assess industry solvency and risk.
Important Considerations
While Net Premiums Written provides a clear view of retained underwriting risk, it does not include operational expenses or claims costs. It is essential to analyze NWP alongside other financial metrics to gauge overall insurer health.
Additionally, rapid growth in NWP without adequate capital reserves can strain an insurer’s solvency. Understanding reinsurance types and their impact on NWP is critical for accurate risk assessment and regulatory compliance.
Final Words
Net Premiums Written reveal how much risk an insurer retains, directly impacting its revenue and underwriting exposure. To gauge an insurer’s true financial strength, compare their NWP trends alongside reinsurance strategies and market conditions.
Frequently Asked Questions
Net Premiums Written (NWP) is the total amount of premiums an insurance company retains after deducting premiums ceded to reinsurers from its Gross Written Premium (GWP). It represents the insurer’s retained underwriting risk and revenue over a specific period.
Net Premiums Written is calculated by subtracting premiums ceded to reinsurers from the Gross Written Premium. Sometimes, commissions or return premiums may also be deducted depending on the context.
NWP is a key performance indicator showing the revenue an insurer retains and the risk it carries. A rising NWP suggests growth and profitability, while a decline may indicate increased risk transfer or revenue loss.
Gross Written Premium represents the total premiums written before any deductions, while Net Premiums Written reflects the premiums retained after subtracting amounts ceded to reinsurers and sometimes commissions or return premiums.
Reinsurance premiums ceded to other insurers are deducted from Gross Written Premium to arrive at Net Premiums Written. This shows how much risk the original insurer keeps on its books after transferring some to reinsurers.
Yes, Net Premiums Written appears in financial statements as it reflects the revenue retained from underwriting activities. It is distinct from Net Premiums Earned, which adjusts for unearned premiums over time.
Investors and analysts track NWP to assess an insurer’s revenue retention, underwriting exposure, and growth trends over time. It helps evaluate financial health and operational performance.
In the U.S., tax codes treat Net Premiums Written as gross premiums minus return premiums and reinsurance costs, excluding experience-based refunds that are considered policyholder dividends. This impacts how insurers report taxable income.
