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 that policyholders pay for insurance coverage to protect against financial loss. However, there are differences between gross premiums and net premiums.
Business premiums, also called gross premiums, are the amounts that an insurance company expects to receive during the life of a term of the policy. This affects the amount that the insured will pay for the insurance contract coverage. For example, if an insured pays € 1,000 for a six-month car insurance policy, the gross premiums for that period will, therefore, be €1,000.
The net premiums relate to income that an insurance company will receive for taking the risk under an insurance contract, minus expenses associated with the provision of coverage under the policy. Insurance companies normally buy reinsurance, which pays claims above a certain monetary amount. This helps protect the insurance company from having to pay for large and catastrophic losses. The amount paid for a reinsurance policy is deducted from gross premiums.
An accrued premium is the premium charged by an insurance company because of a policy that has expired. In other words, the accrued premium is what the insured party has paid for a part of the time the insurance policy was in force but has already expired.
Since the insurance company covers the risk during that time, it considers that the associated premium payments it receives from the insured party are not accrued. Once the time has expired, you can register it as earned.
Insurance policies that are paid under payment plans can also affect net premiums. In a payment plan, the insured does not pay for the validity of the full policy at the beginning or renewal. Instead, the insured makes instalment payments, usually monthly or bi-monthly. Net premiums reflect the proportion of premiums that the insured has already paid and for which the insurance company has already guaranteed coverage.
Are gross commercial and net premiums important?
In short, yes. Insurance companies need to know exactly both their net premiums and their business premiums since the latter allows them to understand the amount of money they are earning for their policies. In this order of ideas, net premiums let them know how much money they will really have left, which gives them an idea of their profitability.