Proportional CoversApplied

Ceding Commission

Q: On the scale above, what commission does a 46% loss ratio earn?

35% — The scale is capped. Any loss ratio at or below 50% earns the maximum 35% — the cedent cannot slide past the agreed ceiling.

Q: Ceding commission primarily reimburses the cedent for:

Its acquisition and administration costs — The cedent incurred 100% of the cost of acquiring the business but keeps only part of the premium. The commission restores that balance on the ceded share.

Commission on ceded premium

What the reinsurer pays back to the cedent for having acquired and serviced the business.

Open the interactive version → definition, quiz, structure diagram and progress tracking

Definition

Ceding commission is a percentage of ceded premium returned by the reinsurer to reimburse the cedent's acquisition costs — brokerage, agency commission, underwriting and policy administration — plus a margin for its overhead. It is the principal negotiating lever on proportional treaties: with premium and losses shared in a fixed ratio, the commission is where the profit actually moves.

Flat commission: a fixed rate agreed at placement, whatever the result.
Sliding-scale commission: the rate moves inversely with the treaty loss ratio between an agreed minimum and maximum, sharing the outcome. A provisional rate is paid during the year and adjusted afterwards.
The slide is quoted as a ratio — "1:1" means one point of commission for each point of loss ratio; 0.5:1 means half a point.

Commission = Provisional rate ± slide × (Provisional LR − Actual LR)

Bounded by the agreed minimum and maximum commission.

Worked example

A treaty pays 30% provisional commission, sliding 1:1 from a maximum of 35% at a 50% loss ratio down to a minimum of 22.5% at a 62.5% loss ratio. A 57% loss ratio earns 28%.

Scenario · figures in USD

A sliding scale adjusted at year end

Provisional commission 30%. Maximum 35% at a loss ratio of 50% or better; sliding 1:1 down to a minimum of 22.5% at 62.5%. Ceded premium for the year is $40M and ceded losses are $22.8M.

Ceded premium	$40.0M
Ceded losses	$22.8M
Treaty loss ratio	57.0%
Commission earned: 35% − (57 − 50) × 1	28.0%
Provisional commission already paid (30%)	$12.0M
Commission actually earned (28%)	$11.2M
Return due to the reinsurer	$0.8M
Reinsurer margin after commission	$6.0M

So whatA sliding scale converts a proportional treaty into something closer to a partnership: the cedent gives back commission in a poor year and keeps more in a good one.

Check your understanding

On the scale above, what commission does a 46% loss ratio earn?

35%. The scale is capped. Any loss ratio at or below 50% earns the maximum 35% — the cedent cannot slide past the agreed ceiling.

Ceding commission primarily reimburses the cedent for:

Its acquisition and administration costs. The cedent incurred 100% of the cost of acquiring the business but keeps only part of the premium. The commission restores that balance on the ceded share.

Word problem

A treaty pays 32.5% provisional commission on ceded premium of $60M, sliding 0.5:1 from a 37.5% maximum at a 55% loss ratio down to a 25% minimum. Ceded losses are $38.4M. What is the final commission and what balance moves?

Show a hint

Loss ratio first. Then apply the 0.5:1 slide to the points above 55%, and check you have not passed the minimum.

Reveal the worked answer

Loss ratio = $38.4M ÷ $60M = 64.0%
Points above the 55% pivot = 9.0
Commission reduction = 9.0 × 0.5 = 4.5 points
Earned commission = 37.5% − 4.5% = 33.0% (above the 25% floor, so it stands)
Earned in dollars = 33.0% × $60M = $19.8M
Provisional paid = 32.5% × $60M = $19.5M
Balance = $19.8M − $19.5M = $0.3M due to the cedent

Final commission 33.0% and the reinsurer owes the cedent a further $0.3M. Counter-intuitively the cedent earns more than provisional despite a 64% loss ratio, because the shallow 0.5:1 slide starts from a generous 37.5% maximum. Always read the slide and the pivot together.