Net vs. Gross Premium Insurance

Gross premium vs. net premium insurance is a topic that can be confusing for most people.
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Gross premium versus net premium insurance is a topic that can be confusing for most people outside of the insurance field. You may think about income taxes or pay stub fields when you hear the words "net" and "gross." However, there is a difference between net and gross premiums regarding insurance. It's critical to know the difference between written, earned, gross and net premiums when looking for insurance. The Insurance Information Institute explains that the primary function of any insurance is the transfer of risk.

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Your premium is the amount of money you pay for your insurance policy. Net premiums are the actual premiums that an insurer receives after any adjustments or deductions, and the gross premium is the total amount of premiums charged before any adjustments or deductions. There are a few critical differences between net and gross premiums, though.

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Net Premium vs. Gross Premium

The phrase "net premium" refers to an insurer's actual premium after any adjustments or deductions have been made. Net premiums are the income the insurance company will receive minus the expenses incurred by providing full coverage. The net premium is what an insurance company uses to fund its operations and pay claims. The amount of the net premium can be different from the gross premium because of things like reinsurance, taxes and policyholder dividends.

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The phrase "gross premium" refers to the total amount of premiums charged before any adjustments or deductions have been made. In other words, it's the total cost of your insurance policy before anything has been subtracted from it. The gross premium is usually higher than the net premium because it includes taxes and policyholder dividends that are later subtracted.

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Written vs. Earned Premium

The written premium is the amount of money charged for an insurance policy when it is first written. The earned premium is the amount of money an insurer has "earned" over a policy period. For example, if you have a one-year insurance policy with a written premium of $1,000, the earned premium would be $1,000 if you kept the policy for the entire year. However, if you cancel the policy after six months, the earned premium would only be $500. Insurance policies that are paid via installment plans as put in place at the start can also affect net premiums, which in turn will affect the earned premium.

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Written premiums include both the gross and net premiums. Written premiums are what the insurance company will charge you at the start of the policy. These written premiums include all policies that the insurance company provides. Policyholders pay premiums for insurance protection, and these insurance companies pay their claims. On the other hand, earned premiums are what the insurance company has actually "earned" from providing you coverage. This is only a portion of the written premiums and includes only those active policies during the policy period.

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GWP Insurance and NWP Insurance

Gross written premium (GWP) and net written premium (NWP) are crucial metrics for insurance companies. GWP insurance is an acronym for "gross written premiums," and NWP insurance is an acronym for "net written premiums." GWP refers to the total amount of money an insurance company collects in premiums from all its policyholders. The International Risk Management Institute says the gross written premium is the total amount of premium charged to servicer policyholders on coverage issued in a particular year before any refunds. NWP, on the other hand, refers to the amount of premium money an insurer keeps after paying out reinsurance and other expenses.

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GWP is a metric used by insurers to measure how much revenue is generated by writing new policies; this metric excludes renewals and other forms of repeat business. In the insurance industry, GWP measures an insurer's growth. On the other hand, NWP is the total amount of premiums written by an insurer minus any reinsurance premiums that it cedes to other insurers.

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