Gross Premium Income is a funny thing, there’s some dispute in the industry with respect to the actual definition. Why? We think it’s because it’s an accounting term and that gives accountants some discretion as to how to treat this on the books.
However, after a little scratching around it’s probably fair to say that there’s a reasonably common definition of Gross Premium Income too:
Gross Premium Income = Total Net Written Premium – Insurance Premium Tax
Net Written Premium
We’ve examined net written premium in some detail on Riskheads before. It’s a measure of the portion of a premium that is kept by the broker or insurer and excludes any sums paid out for reinsurance.
It is important not to confuse this figure with net premiums earned – which is a result of accrual based accounting techniques and only recognizes the premiums which are relevant to that accounting period.
Insurance Premium Tax
The Insurance Premium Tax is a UK tax on insurance premiums. There are equivalents to IPT in most other jurisdictions too. This is taken off the income statement because it doesn’t belong to the insurer. It’s the government’s money and is paid to them.
Gross Premium Income
Thus Gross Premium Income is a statement of the money that an insurer has earned from premiums and eliminates any money that is or will be paid out elsewhere from those premiums.
It’s a good measure of how much an insurer is earning though, of course, it doesn’t take into account earnings on investments such as equities or bonds. It also doesn’t take into account any assets that the insurer has. So you cannot examine an insurer’s financial health based on just this calculation.
It’s less useful for brokers because a broker won’t normally disclose Gross Premium Income. As the majority of the money they take in premiums will go to the insurer; brokers are more interested in Gross Broking Income (though they may refer to Gross Premium Income to help explain this figure).
Gross Broking Income is essentially:
Gross Broking Income = Gross Premium Income – Policy Fees
Finally, Gross Premium Income is considered to be the same thing as Gross Written Premium which is something we tried to define about 3 years ago here on Riskheads. This article isn’t a repeat of that article but rather a clarification of what we learned from writing that article.
Please let us know your thoughts about this updated definition in the comments below.