written_premium

Written Premium

Written Premium is the total amount of premium an insurance company is entitled to receive from all insurance policies it “writes” or sells during a specific period. Think of it as the insurer's total sales figure for the quarter or year. This number is recorded the moment a policy becomes effective, regardless of whether the customer has paid the full amount yet. It represents the total value of the business the insurer has secured, making it a fundamental measure of its market reach and top-line growth. For a value investor sizing up an insurance company, Written Premium is the first chapter in the story, but it's crucial to read the rest of the book to see if the story has a profitable ending.

To truly understand an insurer's performance, you need to distinguish between three related “premium” concepts. Getting this right is key to avoiding common misunderstandings when reading an insurer's financial reports.

This is the full price tag of the insurance policy sold. If you buy a one-year car insurance policy for €1,200 on January 1st, the insurer immediately records €1,200 in Written Premium for that period. It represents the total revenue promised over the full life of the policy. It's a forward-looking indicator of business volume.

Insurance is a service provided over time. The insurer only “earns” the premium as each day of coverage passes. Using our €1,200 annual policy, after one month (which is 1/12th of the year), the insurer has provided one month of coverage and has therefore “earned” €100 of the premium. Earned Premium is the portion of Written Premium that corresponds to the coverage period that has already passed. This is the figure that truly counts as revenue on the income statement.

This is simply the cash that has physically arrived in the insurer's bank account. You might pay your €1,200 premium upfront, or you might pay in monthly installments of €100. Premiums Collected tracks the cash flow, which can differ from both Written and Earned Premiums due to payment plans. The difference between what's collected but not yet earned creates the famous insurance Float—a pool of money the insurer can invest for its own profit, a concept masterfully exploited by investors like Warren Buffett.

It's tempting to see rapidly growing Written Premiums and get excited. More sales, more business, right? Well, not so fast. A savvy investor knows that in the world of insurance, growth for growth's sake can be a recipe for disaster.

An insurer can always grow its Written Premiums by doing one simple thing: lowering its prices. By offering the cheapest policies on the market, it can attract a flood of new customers. This is bad growth. The company is likely underwriting risky policies that will lead to massive future claims. This undisciplined rush for market share often ends in tears and significant losses. Good growth, on the other hand, is when an insurer increases its Written Premiums while maintaining strict underwriting discipline, ensuring that the policies it sells are likely to be profitable.

So, how do you tell the difference between good and bad growth? The single most important metric to look at alongside Written Premium is the Combined Ratio. This ratio measures the company's underwriting profitability.

  • Formula: (Incurred Losses + Expenses) / Earned Premium

The result tells you everything:

  • Below 100%: The insurer is making a profit from its core business of selling policies. This is a sign of health and discipline.
  • Above 100%: The insurer is paying out more in claims and expenses than it's collecting in premiums—an underwriting loss.

A company with high Written Premium growth but a Combined Ratio consistently over 100% is like a shopkeeper proudly announcing record sales while losing money on every item sold. It's a fast track to ruin. The goal for any great insurer is profitable growth.

Think of Written Premium as the speedometer of an insurance company—it tells you how fast it's growing. But as an investor, you're the driver who also needs to check the fuel gauge and the engine temperature before putting your foot down.

  • Check the Fuel: Is the growth coming from a sound pricing strategy or a desperate, undisciplined bid for market share?
  • Check the Engine: Is the underwriting profitable? Keep a close eye on the Combined Ratio.

A healthy insurance company grows its Written Premiums steadily and intelligently, always keeping its Combined Ratio comfortably below 100%. That's the hallmark of a business built to last and a potential gem for a value investor's portfolio.