Gross Premium
What Does Gross Premium Mean?
If you have purchased an insurance policy, you would have paid a premium. The premium refers to the cost or price of the insurance policy.
The term “premium” originates from the early days of insurance, when lenders financing ocean voyages would forgive the loan if the ship was lost at sea due to weather, piracy, or other disasters. However, they would charge an additional fee—called a premium—on top of the original loan amount.
Today, most insurance is sold through intermediaries like brokers and advisors, who are compensated with a commission, typically a percentage of the premiums paid by the insured.
When an insured individual pays their insurance premiums, they are paying a gross premium, which includes amounts to cover commissions for brokers and other selling expenses. After these expenses are accounted for, the insurance company collects the net premium, which is the actual amount the insurer receives from the policyholder.
Insuranceopedia Explains Gross Premium
The gross premium is the total amount the insured pays for an insurance policy, but it is not the amount the insurance company actually earns from writing the policy. Gross premiums are typically adjusted upwards to account for commissions, selling expenses like discounts, and other insurer expenses.
The gross premium consists of two main parts:
- Commissions: These are typically paid to intermediaries, such as brokers or agents, and are usually a percentage of the gross premium paid by the client.
- Net Premium: This is the amount that the insurance company actually collects, which they use to cover administrative costs, maintain reserves for claims, invest for additional profits, and ultimately generate a profit for shareholders and owners.
Insurance companies need to understand both the net and gross premiums. The gross premium helps them understand how much revenue they are generating from their policies, while the net premium shows how much they actually keep, providing insight into their profitability.
In many regions, gross premiums also have significant tax implications. Insurance companies are often taxed based on the gross premiums they write, rather than on their income or net premiums. However, some deductions are allowed.
Additionally, when insurers use reinsurance to offload some of their liabilities and increase their capacity to write more business, they pay reinsurance premiums. These premiums are usually a percentage of the gross premiums received for the specific business being reinsured.
