Annual Premium Equivalent (APE)
An annual premium equivalent (APE) is a common sales measure calculation used by insurance companies in the United Kingdom. The annual premium equivalent is the sum of the total value of regular–or recurring–premiums plus 10% of any new single premiums written for the fiscal year. The annual premium equivalent is the total value of regular or recurring premiums plus 10% of new single premiums written in the period. The present value of new business premiums (PVNBP) is the terminology used in the insurance industry to indicate the present value of total confirmed premiums that will be received from present to future. Calculating the present value of future insurance premiums is important because a premium received today is worth more than the same premium amount due to be paid in the future.
What Is Annual Premium Equivalent (APE)?
An annual premium equivalent (APE) is a common sales measure calculation used by insurance companies in the United Kingdom. The annual premium equivalent is the sum of the total value of regular–or recurring–premiums plus 10% of any new single premiums written for the fiscal year. If desired, the premiums earned by an insurance company can be extended to include all revenues of a given insurance company.
Understanding Annual Premium Equivalent (APE)
Annual premium equivalent (APE) is specifically used when sales contain both single premium and regular premium business. Single premium insurance policies require a single lump-sum payment from the customer or policyholder. The regular premium policies are annualized by taking the premium amount and multiplying it by the frequency of payments in the billing cycle.
The annual premium equivalent calculation is used by the insurance industry to allow comparisons of new business achieved in a specific period. A single-payment premium actually spreads a sale over a long period of time. By contrast, a recurring premium involves separate annual premiums. The APE metric is used to compare single premium payments to the recurring payment premiums. This process helps accurately compare sales between policies with the two different types of premiums.
Insurance companies commonly take the approach of comparing 100% of regular premiums, i.e. the annual premiums received for a policy and 10% of single premiums. However, this only works under the assumption of an average life insurance policy lasting 10 years. Therefore, taking 10% of a single premium annualizes the single lump-sum payment received over the 10 years the policy is in effect.
Annual Premium Equivalent vs. Present Value of New Business Premiums
The present value of new business premiums (PVNBP) is the terminology used in the insurance industry to indicate the present value of total confirmed premiums that will be received from present to future. Present value is a metric of calculating how much a future stream of payments or cash flows are worth in today's dollars.
Calculating the present value of future insurance premiums is important because a premium received today is worth more than the same premium amount due to be paid in the future. The reason for this is that the money received today can be invested and earn a rate of return. Insurance companies earn a significant amount of investment income from investing premiums received from clients.
Like APE, PVNBP makes it possible to compare the sales of two companies having both single premiums and recurring premiums. However, it actually does the opposite of what APE does when it converts recurring premium income to a single number. Instead, PVNBP is the sum of single premiums and the present value of life insurance premiums paid year after year.
Special Considerations
When estimating any future metric, it is important to consider any unforeseen events and how these events may impact any assumptions and estimations. For example, when forecasting a firm's sales revenues, it's important to consider the competition, their product lines and pricing strategy over the forecasted period. Including the competitors can help fine-tune the forecast, which will hopefully be more applicable and provide a margin of safety.
Related terms:
Accounting
Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS. read more
Actuarial Assumption
An actuarial assumption is an estimate of an uncertain variable input into a financial model for the purposes of calculating premiums or benefits. read more
Fiscal Year (FY)
A fiscal year is a one-year period of time that a company or government uses for accounting purposes and preparation of its financial statements. read more
Life Insurance Guide to Policies and Companies
Life insurance is a contract in which an insurer, in exchange for a premium, guarantees payment to an insured’s beneficiaries when the insured dies. read more
Margin of Safety
Margin of safety is an investing principle that involves only procuring a security when its market price is substantially less than its intrinsic value. read more
Net Present Value (NPV)
Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. read more
Pension Plan
A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. read more
Premium
Premium is the total cost of an option or the difference between the higher price paid for a fixed-income security and the security's face amount at issue. read more
Present Value – PV
Present value is the concept that states an amount of money today is worth more than that same amount in the future. In other words, money received in the future is not worth as much as an equal amount received today. read more
Product Line
A product line in business is a group of related products under the same brand name manufactured by a company. Read how product lines help a business grow. read more