Key takeaways
– Net premiums written (NPW) = premiums written during a period after netting reinsurance ceded and adding reinsurance assumed. It measures the amount of premium risk the insurer retains.
– NPW shows sales activity (policies written) but does not equal revenue — earned premiums reflect the portion of written premiums recognized over the coverage period.
– Changes in NPW year over year help assess growth or contraction, management of risk retention, and competitive position. NPW must be combined with loss, expense and reserve metrics to judge profitability.
– Reinsurance, installment payment plans, and unearned premium reserves materially affect the relationship between written and earned premiums.
– For U.S. tax purposes, certain reinsurance premiums are deductible (see 26 U.S.C. § 832).
What is net premiums written?
Net premiums written is the total dollar amount of insurance premiums an insurer issues (premiums written) during a reporting period after adjusting for reinsurance: subtract premiums ceded to reinsurers and add premiums assumed from other insurers. NPW represents how much premium the company keeps on the risks it has decided to retain, and it’s a primary indicator of an insurer’s underwriting scale.
Basic formula
Net Premiums Written (NPW) = Direct Written Premiums + Reinsurance Assumed − Reinsurance Ceded
Relationship to other premium measures
– Gross written premiums (GWP): total premiums written before any reinsurance adjustments.
– Net written premiums (NPW): GWP after reinsurance ceded and assumed — the insurer’s retained written exposure.
– Unearned premium reserve (UPR): portion of written premiums attributable to the remaining coverage period (liability).
– Net premiums earned (NPE): amount of net written premiums that apply to the reporting period; revenue recognized over time.
Conversion between written and earned
Net premiums earned = Beginning unearned premium reserve + Net premiums written − Ending unearned premium reserve
Example (illustrative)
– Direct written premiums (period): $120 million
– Reinsurance assumed: $5 million
– Reinsurance ceded: $30 million
NPW = $120M + $5M − $30M = $95M
If beginning UPR = $20M and ending UPR = $30M:
Net premiums earned = $20M + $95M − $30M = $85M
Why NPW matters
– Sales and growth: Increases in NPW generally indicate more policies/new business or higher pricing on retained risk.
– Retention and risk strategy: A falling NPW could reflect higher cessions to reinsurers (de-risking) or loss of market share; a rising NPW with heavier risk retention could increase volatility.
– Capacity and solvency: Regulators and analysts consider NPW relative to capital or policyholder surplus to monitor concentration and solvency risk.
Key influences on NPW
– Reinsurance strategy: More ceding reduces NPW; assuming reinsurance increases NPW.
– Pricing and product mix: Higher-priced or longer-term products change the pattern of written vs earned premiums.
– Installment plans: Payment timing affects cash flow and earned premium recognition; installments do not change NPW but affect premium receipts and receivables.
– Policy cancellations and endorsements: Affect unearned premium calculations and can change written/earned relationships.
Accounting and tax considerations
– NPW is a balance-sheet/flow measure of written business and is before underwriting expenses. It does not include commissions, claims, administrative costs, or taxes.
– Earned premiums determine revenue recognition over the insurance coverage period. Unearned premium is a liability because the insurer may have to return a pro rata share if the policy is canceled.
– For U.S. federal tax, certain treatment of reinsurance premiums is specified in tax code; see 26 U.S.C. § 832 for rules affecting insurance company taxable income (consult a tax advisor for application).
Limitations of NPW as a sole metric
– NPW does not show profitability. An insurer can grow NPW while underwriting losses or high expenses produce losses.
– Changes in reinsurance strategy can make NPW movement misleading if not analyzed with retention ratios and ceded premium detail.
– NPW is influenced by seasonality, product mix, and timing of large commercial policies.
Practical steps — how to calculate and analyze net premiums written
1. Gather source data
– Obtain the insurer’s schedule of gross written premiums, reinsurance recoverables (ceded premiums), and reinsurance assumed for the period.
– Obtain beginning and ending unearned premium reserve balances.
2. Compute NPW for the period
– Apply NPW = Direct Written Premiums + Reinsurance Assumed − Reinsurance Ceded.
– Reconcile to the insurer’s statutory/GAAP note disclosures to ensure consistency.
3. Convert written to earned
– Calculate Net Premiums Earned = Beginning UPR + NPW − Ending UPR.
– Verify that earned premiums match reported revenue on the income statement (or statutory statement).
4. Check retention and cession metrics
– Retention ratio = NPW / Gross Written Premiums.
– Cession ratio = Reinsurance Ceded / Gross Written Premiums.
– Compare ratios over time to see if the company is retaining more or less risk.
5. Analyze trends and drivers
– Year-over-year and quarter-over-quarter NPW trends: Is growth organic, due to assumed reinsurance, or due to lower cessions?
– Break down NPW by line of business and geography to identify concentration or loss of market share.
6. Compare to profitability and reserve metrics
– Relate NPW to loss ratio, combined ratio (loss + expense ratios), and underwriting profit.
– Check if increasing NPW is paired with sufficient pricing and reserve adequacy.
7. Look for red flags
– Rapid NPW growth without corresponding increases in surplus or capital.
– Sudden shifts in reinsurance cessions or a rise in assumed reinsurance without adequate underwriting information.
– Growing gap between written and earned premiums indicating front-loaded sales or large unearned reserves.
8. Use peer benchmarks
– Compare NPW growth, retention ratios, and NPW-to-surplus across peers and industry averages to assess competitiveness and risk appetite.
9. Document assumptions and adjustments
– Note any one-off items (large facultative treaties, retroactive reinsurance, line-of-business exits) that affect NPW comparability.
10. Review regulatory and tax implications
– Confirm that reinsurance arrangements meet regulatory credit standards.
– For tax planning, consult tax guidance like 26 U.S.C. § 832 and qualified tax counsel.
Useful ratios and indicators
– Retention ratio = Net Written Premiums / Gross Written Premiums
– NPW growth rate = (This period NPW − Prior period NPW) / Prior period NPW
– NPW-to-surplus (or to policyholders’ surplus) = NPW / Policyholders’ Surplus — gauges leverage from underwriting
Practical example checklist for an analyst
– Reconcile gross written premiums to statutory filings.
– Confirm ceded and assumed reinsurance amounts and review treaties for timing and coverage.
– Calculate NPW and convert to NPE using UPR balances.
– Compute retention ratio and compare to prior periods and peers.
– Place NPW trends alongside combined ratio and reserve adequacy assessments.
– Flag any material one-time items and adjust comparatives.
Conclusion
Net premiums written is a core activity metric showing how much premium an insurer has retained on the books during a period. It’s essential for understanding scale and distribution strategy, but it must be analyzed with earned premiums, loss and expense measures, reinsurance detail, and capital adequacy to draw conclusions about profitability and solvency. Regular reconciliation, line-of-business breakdowns, and benchmarking are practical ways to use NPW effectively.
Sources and further reading
– Investopedia, “Net Premiums Written,” Dennis Madamba (summary and concepts).
– Cornell Law School, 26 U.S. Code § 832 – Insurance Company Taxable Income (tax treatment of insurance company premiums and reinsurance).