# Understanding Written Premiums: An Insurance Industry Essential

## What Is Written Premium?

Written premium is an accounting term in the [insurance](https://www.investopedia.com/terms/i/insurance.asp) industry used to describe the total amount that customers are required to pay for insurance coverage on policies issued by a company during a specific period of time.

Written premiums factor in the amount of [premium](https://www.investopedia.com/terms/i/insurance-premium.asp) charged for a policy that has already become effective, regardless of what portions have been earned. Unlike earned premiums, which represent the portion of coverage that has already been provided, written premiums reflect the total amount due for all active policies.

Written premiums can be analyzed as gross (before reinsurance) or net (after reinsurance), offering insight into a company's performance within the cyclical and competitive nature of the insurance industry.

### Key Takeaways

*   Written premiums represent the total amount customers agree to pay for insurance policies during a specific period.
*   They are different from earned premiums, which are recorded as actual earnings once the insurance service is provided.
*   Written premiums can be measured as gross or net, affecting how much the company keeps after costs.
*   Written premiums are the main revenue source for insurance companies and appear at the top of the income statement.
*   The insurance industry is cyclical and competitive, often facing price pressures depending on market conditions.

## Understanding the Mechanics of Written Premiums

People pay for insurance coverage to protect themselves against financial loss. For example, if a policyholder has a car accident and is insured for it, the insurance company is obligated to foot the bill. In exchange for taking on this risk, the company charges its customers premiums.

Premiums for insurance companies are like sales for retailers. Insurance companies sell as many premiums as possible and then use the money they generate to cover losses and expenses, hopefully with enough left to turn a [profit](https://www.investopedia.com/terms/p/profit.asp).

Written premiums calculate the total amount customers agree to pay for insurance policies sold during the [accounting period](https://www.investopedia.com/terms/a/accountingperiod.asp). For example, if an insurance company over the course of its [fiscal year](https://www.investopedia.com/terms/f/fiscalyear.asp) (FY) sells 1,000 new contracts that require each customer to pay $1,000 in premiums, its written premiums for that period would be $1 million.

## Comparing Written and Earned Premiums

Written premiums are different from [premiums earned](https://www.investopedia.com/terms/e/earnedpremium.asp), which are the amount of premiums that a company books as [earnings](https://www.investopedia.com/terms/e/earnings.asp) for providing insurance against various risks during the year. Insured policyholders pay premiums in advance, so insurers do not immediately consider premiums paid for an insurance contract as profit. The insurer can change the status of the premium from unearned to earned only when its full obligation is fulfilled. 

## Distinguishing Between Gross and Net Premiums

Written premiums may be measured as a [gross](https://www.investopedia.com/terms/g/grossincome.asp) or [net](https://www.investopedia.com/terms/n/net-premium.asp) number.

The gross figure doesn’t include deductions like commissions to agents, legal expenses, salaries, taxes, clerical costs, and [reinsurance](https://www.investopedia.com/terms/r/reinsurance.asp), which transfers some risk to another insurer.

Alternatively, written premiums can be measured as net, a figure that takes into account associated costs linked to a policy. Net premiums written represents how much of the premiums the company gets to keep for assuming risk. As such, looking at changes to net premiums written from year to year is a useful way to gauge the health of insurance companies.

## Key Factors Affecting Written Premiums

Written premiums are the principal source of an insurance company's revenues and thus appear on the top line of the [income statement](https://www.investopedia.com/terms/i/incomestatement.asp). The insurance industry is [cyclical](https://www.investopedia.com/terms/c/cyclical_industry.asp) (along with the [business cycle](https://www.investopedia.com/terms/b/businesscycle.asp)) and competitive, with numerous participants fighting for [market share](https://www.investopedia.com/terms/m/marketshare.asp) primarily on the basis of price.

Excess underwriting capacity in the industry pushes prices downward. Meanwhile, when there is a shortage of capacity, insurers can exercise a measure of [pricing power](https://www.investopedia.com/terms/p/pricingpower.asp) in premiums.

## The Bottom Line

Written premium is the total amount customers pay for insurance coverage during a set period and represents the top-line revenue for insurers. Unlike earned premiums, it isn't counted as income until coverage is provided.

Reported as gross or net (after reinsurance costs), written premiums reflect an insurer's retained business and competitiveness. Understanding them is necessary to evaluating an insurance company's financial strength and market strategy.