Net Premium
What Does Net Premium Mean?
Net premium can have several meanings. First, it refers to the portion of the premium necessary to cover future losses. Second, it denotes the amount remaining after deducting the agent’s commissions from the gross premium. Third, in the context of actuarial valuation, net premium 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
Since net premiums do not account for the expenses incurred in their calculation, companies usually add these costs to the net premiums to determine the gross premium. These expenses can include agent commissions, legal settlement costs, salaries, taxes, and other administrative expenses. To calculate these amounts, companies often use a combination of fixed expenses and a percentage of flat loading applied to the net premium.
The gap between net and gross premiums varies by product and insurer, which is one reason the average cost of life insurance differs so much from one company to the next. The actuarial meaning of net premium comes up most often with permanent policies, where the insurer must project benefit payments and premiums over a policyholder’s lifetime. That projection is a big part of what determines whole life insurance rates.
