Net Premium
Categories: Insurance
An insurance policy has two basic parts: the premiums and the benefits. The terms get a little confusing, because they both seem like good things. Premium ice cream! Friends with benefits! It seems like they should be on the same side of an equation. But, in the insurance game at least, they go on opposite sides.
Premiums are what you pay to the insurance company. Those checks you write each month for your home insurance, or life insurance, or car insurance...those are known as premiums. Meanwhile, the term "benefits" refers to the payments you receive from an insurance company, if you file a claim. So, from the insurance company's prospective, the premiums are the money they receive and benefits are the money they pay out. Premiums in...benefits out.
The term "net premium" fine-tunes the premium side of the equation. It has a few potential meanings, depending on the situation.
In its simplest form, it can apply to the amount of premiums the insurance company actually gets to keep. So...there's the amount it receives, the amount that you send in as your monthly check. That figure is known as the gross premium. From that, the insurance company might have to pay for an agent's commissions. Subtract those commissions, and you're left with the net premiums.
So the company receives its gross premium check from you. Then it has to give a share of that money to the agent who sold you the policy. After taking that commission into account, what's left is the net premium.
On a more complicated level, the term can refer to the amount of the premiums likely to be left over, once benefits get paid out. First, the company calculates the present expected value of the benefits it will likely have to pay out as part of the policy. Then it computes the present expected value of the premiums it's likely to bring in. It subtracts the premiums from the benefits.
Basically, the company (using all its actuarial data and other algorithms to make an educated guess) estimates the amount each policy will likely cost it in benefits. Then it does a similar projection for the amount of premiums its likely to receive. The difference between these figures provides the net premium number.
