What is Annual Premium Equivalent (APE)
An annual premium equivalent (APE) is a common sales measure calculation used by insurance companies in the United Kingdom, where the sales of a given insurance company are estimated by taking the value of regular premiums, plus 10 percent of any new single premiums written for the fiscal year. If desired, the premiums earned by an insurance company can be extended to include all revenues of a given insurance company.
BREAKING DOWN Annual Premium Equivalent (APE)
Annual premium equivalent (APE) is specifically used when sales contain both single premium and regular premium business. This calculation is used by the insurance industry to allow comparisons of new business won in a given time period. A single-payment premium actually spreads a sale over a long period of time. By contrast, a recurring premium involves separate annual premiums. APE is used as a device to compare single premium payments to the recurring payment premiums. This helps accurately compare sales between policies with the two different types of premiums.
Insurance companies commonly take the approach of comparing 100 percent of regular premiums, i.e. the annual premiums received for a policy and 10 percent of single premiums. However, this only works under the assumption of an average life insurance policy lasting 10 years. Therefore, taking 10 percent of a single premium annualizes the single lump-sum payment received over the 10 years the policy is in effect.
When estimating any future metric, it is important to consider any unforeseen events and how these events may impact your assumptions and estimations. For example, when forecasting a firm's sales revenues, you would want to consider the competition and what their product lines and pricing strategy will be over the forecasting period. This will allow you to fine-tune your estimate, which will hopefully be more applicable and provide you with a margin of safety.
Annual Premium Equivalent vs. Present Value of New Business Premiums
The present value of new business premiums (PVNBP) is the terminology used in the insurance industry to indicate the present value of total confirmed premiums that will be received from present to future. Like APE, PVNBP makes it possible to compare the sales of two companies having both single premiums and recurring premiums. However, it actually does the opposite of what APE does when it converts recurring premium income to a single number. Instead, PVNBP is the sum of single premiums and the present value of life insurance premiums paid year after year.