Net Premium

Definition - What does Net Premium mean?

Net premium is a term that can have various meanings. One, it refers to the portion of the premium needed to pay for future losses. Two, it also refers to the resulting amount after deducting the agent's commissions from the gross premium. Third, as used in actuarial valuation, it refers to the present expected value of the benefits from a policy minus the present expected value of all future premiums.

Insuranceopedia explains Net Premium

As net premium does not consider the expenses to be incurred in its calculation, companies usually add them to the net premiums to arrive at the gross premium. These expenses include commissions for the agents who sold the policies, legal expenses in settlement, salaries, taxes and other administrative expenses. In determining their amount, companies usually use a combination of fixed expenses and an allowed percentage of flat loading to the net premium.

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