What Does Developed to Net Premiums Earned Mean?
Developed to net premiums earned refers to the ratio of developed premiums to the net premiums earned. The gross premiums written by an insurance company comprise the premium to cover projected losses (i.e., net premium), plus some funds for administrative and other expenses (i.e., loading). The ratio of the premiums that have developed over a given period of time to the net premiums serves as an indicator of whether an insurance company has enough reserves to cover its actual losses. Reserves are set up from the net premium.
Insuranceopedia Explains Developed to Net Premiums Earned
Gross premiums, however, are not paid one time; they are usually paid in quarterly, semiannual or annual installments. It is only when premiums are actually paid that they are considered income (i.e., developed premiums), so it is possible that the paid or developed premium is less than the estimated net premium. As a hypothetical 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 is $4,160 and the net premium is $8,000.