Definition
Direct Written Premium refers to the total amount of insurance premiums written by an insurance company over a certain period, usually one year. This measure includes all premiums secured directly from policyholders for insurance policies issued by the company and represents the gross revenue earned from underwritten policies before any deductions for ceding portions to reinsurers.
Relevance
Understanding the Direct Written Premium is vital for:
- Analyzing the insurance company’s market share and scale of operations.
- Evaluating the growth in primary insurable interest and insurance product uptake among consumers.
- Management and strategic planning in an insurance company.
Reinsurance Clarification
Direct Written Premium does not account for portions of the premiums that are ceded to reinsurance companies. These ceded premiums represent a risk management strategy whereby the insurance provider reduces its exposure to potential large claims by sharing some risk with other insurance entities.
Regulations and Compliance
This financial metric has accounting and regulatory importance, requiring adherence to local insurance regulation guidelines and frameworks such as the Insurance Act.
For further detailed reading on insurance regulations and practices, you can consult:
- The National Association of Insurance Commissioners (NAIC) website
- Your local government’s insurance act, which dictates the rules and guidelines surrounding policy underwriting and premium collection.
