Gross and Net Premiums: funny names?

[Michael_14]

I understand that Net Premiums are calculated WITHOUT taking expenses into account. While Gross Premiums are calculated WITH taking expenses into account.

Can anyone explain why we give these two things their names of Net and Gross? It seems quite odd to me given that the usual definitions of Net and Gross of any quantity would see them the other way around. Net normally means that all factors have been taken into account in the figure.... doesn't it?

e.g. Given 30% tax on earnings: A gross investment return of $100 would be $70 net of tax.

Regards,
Michael

 

[Fiasco]

It's all consistent. The gross figure should always be higher than the net figure.

So the gross investment income is higher than the net investment income and the gross premium is higher than the net premium.

 

[Michael_14]

Thanks for your response, I appreciate it. I must say however, that this definition for net and gross seems a bit silly to me.

e.g. if we had:
1. an investment return of $100, and then
2. a tax refund of $10 on the investment,
Then your definition would say that the:
$100 return was the NET investment return, and the
$110 final adjusted figure was the GROSS investment return.

I have never heard anyone use the terms in this way. Normally people call the final figure, taking into account all adjustments the NET figure. It just so happens that usually the adjustments are subtractions such as tax or expenses.

 

[yeah_baby]

I think you're right that a net figure can be bigger than a gross one if the adjustment is some sort of credit. So making the distinction "gross is bigger, net is smaller" is not valid.

As far as premiums go I would think of it more like this:

Gross premium = premium actually received by company

Net premium = part of premium actually covering benefits i.e. after deducting the part of the premium covering expenses/bonuses.

To me, this seems more consistent with the usual gross/net relationship e.g. income, where the gross amount is the actual amount received and the net amount is after making a deduction for the "expense" of tax (or "negative expense" of tax credit as in your example).

Hope this helps

 

[Michael_14]

That makes a lot of sense. That must have been what they intended when they gave those names.

You've really helped. Thanks!!