What Does Direct Premiums Written Mean?
Direct premiums written are the total premiums received before considering reinsurance ceded. Direct premiums written represent the growth of a company’s insurance business during a given period. It can include both policies written by the company and policies written by its affiliated companies.
Direct Premiums Written Explained
While insurance companies can increase revenue by increasing premiums on policies that have come up for renewal, the main driver for growth in this area is writing new policies. Direct written premiums show how many new premiums were written over the course of the year, even if those premiums are ultimately not collected.
A new insurance policy written is included in the direct written premiums figure, since the risk presented by the policy has not yet been passed on to any reinsurance company in exchange for a portion of the policy’s premium. Premiums obtained through reinsurance services are not included in this figure because they do not represent premiums written by the company. Instead, those premiums are ceded by other companies in exchange for taking on risk.
Direct premiums written differ from direct premiums earned. The latter depends on how the company intends on earning the premium over the life of the policy. When direct written premiums exceed direct premiums earned a company is considered to be experiencing an increase in underwriting volume. The sum of an insurance company’s direct written premiums and its assumed premiums is referred to as gross premiums written. It does not take into account the company’s risk management strategies and tactics, especially considering its use of ceded reinsurance.
State taxes that insurance companies owe depends on how many states the insurer operates in. Insurance companies that operate in different states may owe a proportional amount of their direct written premiums, with the proportion equal to the amount of direct written premiums from the state levying taxes divided by the total amount of direct written premiums the company has for all states in which it operates.
Direct Premiums Written and Gross Premiums Written
Gross premiums written is the sum of direct premiums written and assumed premiums written prior to the effect of ceded reinsurance is taken into account. Direct premiums written represents the premiums on all policies that a company’s insurance subsidiaries have issued during the year. Assumed premiums written, meanwhile, represents the premiums that the insurance subsidiaries have received from an authorized state-mandated pool or under previous fronting facilities.