DEFINITION of 'Developed To Net Premiums Earned'

The ratio of developed premiums to net premiums earned over a given time period. Developed to net premiums earned indicates whether an insurance company is charging high enough premiums to cover benefits guaranteed by the policies it writes, referred to as its loss reserves.

BREAKING DOWN 'Developed To Net Premiums Earned'

Insurance companies have to balance the premiums they bring in by writing policies with the benefits that those policies are guaranteeing. They set aside required reserves in order to ensure that they have enough money to pay for future claims, with any money left over after creating a reserve considered to be profit. Insurance companies want to make sure that their loss reserve is enough to cover its liabilities, but not too large so as to limit opportunities for using premiums to bring in more revenue through investment activities.

When evaluating the financial health of an insurance company, it is important to take note of the mix of policy types that the business has from one period of time to another. If the company expands from only offering personal auto insurance to group auto insurance, starts offering policies in different areas or to people with different risk profiles, or changes its mix in any way, then it will be more difficult to decipher what its developed to net premiums earned is saying.

In general, the smaller an insurance company’s developed to net premiums earned ratio becomes, the less padding it has between what it is bringing in compared to what it may have to pay out. This calculation is relatively straightforward for policies that have short durations, such as an auto policy that lasts one year, since these policies typically have a single premium and create a short-term liability. Multi-year policies are more complicated, since they involve premiums paid over separate time periods and a longer risk profile.

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