Developed To Net Premiums Earned
What Does Developed To Net Premiums Earned Mean?
The “developed to net premiums earned” ratio refers to the relationship between developed premiums and net premiums earned. Gross premiums written by an insurance company consist of the premium to cover projected losses (i.e., net premium) as well as funds for administrative and other expenses (i.e., loading). This ratio compares the premiums that have developed over a given period to the net premiums, serving as an indicator of whether an insurance company has sufficient reserves to cover its actual losses. Reserves are established from the net premium.
Insuranceopedia Explains Developed To Net Premiums Earned
Gross premiums, however, are not paid as a lump sum; they are typically paid in quarterly, semiannual, or annual installments. It is only when premiums are actually paid that they are considered income (i.e., developed premiums). Therefore, the paid or developed premium may be less than the estimated net premium. For example, if the annual gross premium is $10,000 and the semi-annual premium is $5,200 on a policy with an estimated loading of 20 percent, the developed premium after six months would be $4,160, while the net premium would be $8,000.
