What Is Developed to Net Premiums Earned?
Developed to net premiums earned is the ratio of developed premiums to net premiums earned over a given period. This ratio 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.
- The developed to net premiums earned ratio compares an insurance company's offered premium that has grown in a specific year to its net earnings on premiums.
- This ratio is an indicator of whether an insurance company is charging premiums that are high enough to cover its benefits.
- Insurance companies can use this ratio to make sure that their loss reserve of funds is enough to cover their liabilities.
Understanding Developed to Net Premiums Earned
Insurance companies have to balance the premiums they bring in by writing policies with the benefits they guarantee. The insurers must set aside required reserves 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 ensure that their loss reserve of cash is enough to cover their liabilities, but not too large to limit opportunities for using premiums to bring in more revenue through investment activities.
Measure of Stability
When evaluating the financial health of an insurance company, it is essential to take note of the mix of policy types that the business has from one period of time to another.
For example, if a company expands from only offering personal auto insurance to group auto insurance, starts offering policies in different areas or to people with varying profiles of risk, or changes its mix in any way, it is more challenging to decipher what its developed to net premiums earned ratio indicates.
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 insurance 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, like life insurance, for example, are more complicated since they involve premiums paid over separate periods and a more extended risk profile.
Consumers can find these ratios in many states and through the National Association of Insurance Commissioners' (NAIC) online database.
The NAIC's Insurance Regulatory Information System (IRIS) is a collection of analytical solvency tools and databases designed to provide state insurance departments with an integrated approach to screening and analyzing the financial condition of insurers operating within their respective states.
According to the NAIC, the IRIS was developed by state insurance regulators of NAIC committees to assist state insurance departments in providing resources to insurers with the greatest need for regulatory attention.