Why Written Premium and Cash Collections Differ
An insurer may issue or bind coverage today, receive only part of the premium today, and collect the balance later. Accrual accounting separates these events: the premium is recorded when the insurer has written the policy or recorded a valid premium adjustment under its accounting convention, while a customer payment is recorded when cash is received. Therefore, the amount of written premium in a period need not equal the cash collected in that period.
This distinction matters when interpreting insurance results and checking accounting records. A cash receipt may settle an amount due from an earlier period, while a policy written in the current period may remain unpaid. A careful calculation identifies each transaction by type and date before adding amounts.
The exact recognition date is governed by the insurer’s accounting and policy-recording convention. For the examples here, assume a premium is written when coverage is bound and the policy transaction is recorded. A quote that has not been accepted or bound is not written premium under that assumption. If an organization uses another documented convention, apply that convention consistently at period-end.
Written premium is not a synonym for cash received, and neither amount by itself tells how much premium is associated with coverage already provided. The allocation of premium across coverage time is a separate accounting question; this tutorial focuses on the initial recording of written premium and the timing of cash.
Recording the Premium and the Receipt
When a policy is written but not yet fully paid, the insurer generally records a premium receivable, an asset representing the amount due from the customer. The corresponding credit records written premium. If the customer pays some amount at issuance, that part is debited to cash and only the unpaid balance is debited to premium receivable.
When cash is later received for an existing premium receivable, the insurer debits cash and credits premium receivable. That collection changes the form of the asset; it does not create written premium a second time. A premium adjustment recorded later is treated as an additional written-premium transaction for that period, with the offset recorded as cash or a receivable depending on what is paid.
| Event | Debit | Credit | Effect on current-period written premium |
|---|---|---|---|
| Policy written; premium unpaid | Premium receivable | Written premium | Increases by the premium written |
| Policy written; part paid immediately | Cash and premium receivable | Written premium | Increases by the full premium written |
| Customer pays an existing receivable | Cash | Premium receivable | No new written premium |
| Premium increase recorded and unpaid | Premium receivable | Written premium | Increases by the recorded adjustment |
These entries describe the basic accrual mechanics. They do not include taxes, fees, commissions, write-offs, or other adjustments; if a problem supplies such items, identify how the problem says they are treated before calculating premium or receivables.
Worked Example: Separating Current Written Premium From Collections
A hypothetical insurer begins the month with a $500 premium receivable. It writes a policy for $1,250 and receives $450 immediately. Later in the month, it records a $150 premium increase that remains unpaid. It also collects $300 on the opening receivable. Find the month’s written premium, cash collections, and ending premium receivable.
Assumptions. Use accrual accounting and record the policy when written and the increase when recorded. All amounts are nominal dollars. There is no interest, mortality assumption, or stochastic loss distribution; the transactions are fixed amounts.
Step 1: Calculate written premium. The new policy contributes $1,250. The recorded increase contributes another $150:
The $300 collected on the opening receivable is not new written premium: it settles a balance arising before this month.
Step 2: Calculate cash collections. The insurer receives $450 at issuance and later collects $300 on the opening receivable:
Step 3: Roll forward the receivable. Of the new policy’s $1,250 premium, $450 is paid immediately, leaving $800 unpaid. The $150 increase is also unpaid. The opening $500 receivable is reduced by the $300 collection, leaving $200:
Check. The receivable reconciliation gives the same result: $500 opening receivable plus $1,400 written premium less $750 cash collections equals $1,150. The method avoids the common mistake of treating the $300 collection as current written premium or omitting the unpaid opening balance.
Cutoff: Which Period Contains the Written Premium?
Written premium is assigned to a period using the applicable recognition convention and transaction date, not simply the date on which cash reaches the insurer. A quote is not the same as a bound policy: if a customer has not accepted coverage and the insurer has not bound it, the quoted amount is not written premium under the convention used here. Conversely, a written policy can contribute premium even if its customer pays after the accounting period closes.
A useful way to analyze cutoff is to create a transaction list with separate columns for the date coverage is bound or the adjustment is recorded, the written-premium amount, and the date and amount of cash received. Then classify each item into the accounting period before totaling. This prevents the cash date from silently replacing the policy transaction date.
Worked Example: Binding Date Versus Cash Date
A hypothetical insurer uses the convention that a policy contributes written premium when it is bound and recorded. Policy A is bound and recorded on December 30 for $1,800; its customer pays on January 10. A quote for Policy B, priced at $1,100, is sent on December 30 but is not accepted and bound until January 2. Policy C is bound and recorded on December 31 for $700, which the customer pays that day. Find December written premium and cash collections, and identify January written premium from these transactions.
Assumptions. The stated binding-and-recording convention governs. All amounts are nominal dollars; there is no interest, mortality assumption, or stochastic loss distribution.
Step 1: Classify the December transactions. Policy A is bound in December, so its $1,800 is December written premium even though it is unpaid at year-end. Policy B is only a quote in December, so its $1,100 is not December written premium. Policy C is bound in December, so its $700 is also December written premium.
Step 2: Identify December cash. Policy A produces no December receipt. Policy B produces no December receipt in the facts given. Policy C produces a $700 receipt on December 31:
Step 3: Classify January written premium. Policy B is first bound and recorded on January 2, so its $1,100 contributes to January written premium. Policy A’s January 10 payment is a collection of a December receivable, not new January written premium.
Check. December’s $2,500 written premium consists of the two policies bound in December, while only $700 is collected in December. The common error is to include the unbound quote in December or move Policy A’s written premium into January merely because payment arrives then.
Premium Adjustments and the Receivable Rollforward
A policy’s premium can change after the initial transaction. For this tutorial, the essential accounting point is limited: when a valid premium increase is recorded, it contributes to written premium in the period in which it is recorded under the stated convention. If the increase is unpaid, the offset is an increase in premium receivable; if some is paid at that time, the entry includes cash for the amount received.
The same rollforward logic applies to receivables across periods. With no write-offs or other receivable adjustments, the balance at period-end equals the opening balance plus premiums charged to customers during the period, less cash collected. Written premium is the full amount charged through policy transactions and adjustments; cash collected can relate to both opening and current balances.
The formula follows from the debit-and-credit behavior of the receivable account. A policy charge or recorded unpaid increase debits receivable and raises its balance. A customer receipt credits receivable and lowers its balance. Adding all debits to the opening balance and subtracting all credits gives the ending balance. If write-offs, refunds, or other receivable credits are present, they must also be included; the simplified equation does not apply without modification.
Worked Example: A Recorded Increase With Payments on Two Balances
A hypothetical insurer begins a month with a $600 premium receivable from a policy written earlier. During the month, it writes a new policy for $2,000, receives $500 immediately, and records a $240 increase on that policy, which remains unpaid. It collects $200 on the opening receivable. Find current-period written premium, cash collections, and ending receivable.
Assumptions. The new policy and the recorded increase are written-premium transactions in this month. All amounts are nominal dollars; there is no interest, mortality assumption, or stochastic loss distribution.
Step 1: Calculate written premium. Include the full premium on the new policy and the recorded increase:
The $200 collection on the opening balance is not part of this written-premium total.
Step 2: Calculate cash collections. The insurer receives $500 at policy issuance and $200 on the opening receivable:
Step 3: Calculate the ending receivable by tracing balances. The opening receivable has $600 − $200 = $400 remaining. The new policy has $2,000 − $500 = $1,500 unpaid, and the $240 increase remains unpaid:
Check. The rollforward gives $600 + $2,240 − $700 = $2,140. The result agrees. The common mistake is to subtract only the $500 paid on the new policy and forget that the $200 receipt also reduces the opening receivable.
Common Exam Traps
- Equating written premium with cash. A policy may be written in full even when only a deposit is collected. Record the unpaid part as a receivable rather than reducing written premium.
- Counting a collection twice. A later receipt settles a receivable; it is not a second premium charge.
- Ignoring opening balances. Ending receivables depend on both the opening balance and current-period charges and collections.
- Using a quote as written premium. Under the stated convention, an unaccepted and unbound quote is not a written policy.
- Assigning a policy to the cash period. Apply the specified recognition convention to the policy transaction date, then classify cash independently.
Check Your Understanding
For each problem, use the stated accrual convention and keep written premium, cash collections, and receivables separate. Assume nominal dollars, no interest, no mortality assumption, and no stochastic loss distribution.
- A policy is written for $960, and the customer pays $240 at issuance. There is no opening receivable or other transaction. Find written premium, cash collections, and ending receivable. (Answer: Written premium $960; cash collections $240; ending receivable $720.)
- An insurer opens the period with a $420 premium receivable and collects $170 on it. It writes a new $1,350 policy and receives $500 immediately. Find current-period written premium, cash collections, and ending receivable. (Answer: Written premium $1,350; cash collections $670; ending receivable $1,100.)
- Under a convention that records premium when coverage is bound, a $2,100 policy is bound on December 31 and paid in January. A separate $800 quote sent in December is not bound until January 3. Find December written premium and cash collections, and January written premium from these transactions. (Answer: December written premium $2,100; December cash collections $0; January written premium $800.)
- An insurer opens with a $900 receivable. It writes a $1,750 policy, of which $650 is paid immediately, records an unpaid $120 increase, and collects $400 on the opening balance. Find written premium, cash collections, and ending receivable. (Answer: Written premium $1,870; cash collections $1,050; ending receivable $1,720.)
- An insurer opens with a $640 receivable. During the period, it writes a $900 policy and collects $300 on it, records an unpaid $120 increase, and writes another policy for $520, unpaid. It collects an additional $350 on the opening receivable. Find written premium, total cash collections, and ending receivable. (Answer: Written premium $1,540; cash collections $650; ending receivable $1,530.)