Net premiums and gross premiums are terms used to describe the income an insurance company receives in exchange for the risks it assumes under insurance contracts. Premiums are the amounts policyholders pay for insurance coverage to protect them against financial loss. However, there are differences between gross premiums and net premiums.
Gross premiums are the amounts an insurance company expects to receive over the life of a policy term. This affects the amount the policyholder will pay for coverage under the insurance contract. For example, if a policyholder pays $1,000 for a six-month automobile insurance policy, the gross premiums for that period are $1,000.
Net premiums refer to the income an insurance company will receive for assuming risk under an insurance contract, minus expenses associated with providing coverage under a policy. Insurance companies commonly purchase reinsurance, which pays for claims above a certain monetary amount. This helps protect the insurance company from having to pay for large, catastrophic losses. The amount paid for reinsuring a policy is deducted from gross premiums.
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Insurance policies that are paid under installment plans can also affect net premiums. In an installment plan, a policyholder does not pay for the entire policy period at inception or renewal. Instead, the policyholder makes installment payments, usually monthly or bimonthly. Net premiums earned reflect the portion of the premiums the policyholder has already paid and for which the insurance company has already afforded coverage.
Gross premiums and net premiums are important for the calculation of taxes owed by the insurance company. State insurance departments typically impose taxes on income received by insurance companies. Tax laws, however, may make allowances for gross premium reduced by expenses or unearned premiums. For example, the Pennsylvania Department of Revenue imposes a tax on gross premiums written by Pennsylvania insurance companies, but the tax does not apply to amounts deducted for reinsurance. It also does not apply to gross premiums not earned because the insurance company or policyholder canceled a policy before the expiration of the policy term.