Proportional CoversApplied

Sliding Scale Commission

Q: In the scenario above, what stopped commission in Year C from falling to the 13% the formula implied?

The treaty's minimum commission floor — Every sliding scale is bounded by an agreed minimum — the formula can imply a number below it, but the floor is what is actually paid.

Commission that moves with the loss ratio

A ceding commission that rises when the loss ratio is good and falls when it is bad, inside agreed floors and ceilings.

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

Definition

A sliding scale commission replaces a single fixed ceding commission with a schedule: the commission percentage moves inversely with the treaty's loss ratio between an agreed maximum and minimum. A good year pays the cedent more commission; a bad year pays less — sharing result volatility between cedent and reinsurer without the full complexity of a separate profit commission.

Unlike profit commission, which is a top-up calculated after the year closes, sliding scale commission is a single mechanism that sets the commission rate itself — there is no separate payment layered on top of it.
The scale is defined by a provisional commission, a maximum, a minimum, and a slide ratio — how many points of commission move for each point the loss ratio moves — and scales are rarely symmetric, so the wording matters.
It caps the reinsurer's commission cost in a bad year, since commission cannot fall below the minimum, while capping the cedent's upside in a good year, since commission cannot rise above the maximum — both sides trade some volatility for a floor.

Commission % = Provisional % − Slide × (Loss ratio % − Provisional loss ratio %)

Bounded between the agreed minimum and maximum however far the loss ratio actually moves.

Worked example

A treaty carries a 30% provisional commission at a 55% provisional loss ratio, sliding one point of commission for every two points the loss ratio moves, capped between 25% and 35%. A loss ratio of 45% — ten points better than planned — moves commission up five points to 35%, the cap.

Scenario · figures in USD

Three years, one scale

A quota share treaty carries a sliding scale: 28% provisional commission at a 58% provisional loss ratio, sliding 1 point of commission for every 2 points of loss ratio, capped between a 20% minimum and a 34% maximum.

Provisional commission / loss ratio	28% at 58% LR
Slide	1 point of commission per 2 points of loss ratio
Commission band	20% minimum – 34% maximum
Year A — loss ratio 48%	Commission 33%
Year B — loss ratio 68%	Commission 23%
Year C — loss ratio 88%	Formula gives 13%, floored at 20%

So whatThe scale did exactly what it was built for in Years A and B — commission tracked the result. In Year C the loss ratio was so bad the raw formula would have paid an unrealistic 13%; the 20% floor exists precisely so the cedent is never paid less than that, however bad the year gets.

Check your understanding

In the scenario above, what stopped commission in Year C from falling to the 13% the formula implied?

The treaty's minimum commission floor. Every sliding scale is bounded by an agreed minimum — the formula can imply a number below it, but the floor is what is actually paid.

How does sliding scale commission differ from profit commission?

Sliding scale sets the commission rate itself; profit commission is a separate top-up calculated after the fact. Sliding scale replaces the ceding commission calculation itself; profit commission sits alongside a fixed commission as an additional payment.

Word problem

A treaty's sliding scale runs a 32% provisional commission at a 52% provisional loss ratio, sliding 1 point of commission for every 1.5 points of loss ratio, capped between a 22% minimum and a 38% maximum. Calculate the commission for a year that closes at a 40% loss ratio, and for a year that closes at a 76% loss ratio.

Show a hint

Find how many points the loss ratio moved from the provisional figure, convert that to commission points using the slide, then apply the floor and ceiling.

Reveal the worked answer

Year 1: loss ratio 40% is 52% − 40% = 12 points better than provisional
Commission points = 12 ÷ 1.5 = 8 points up; commission = 32% + 8% = 40%
The 40% figure exceeds the 38% maximum, so commission is capped at 38%
Year 2: loss ratio 76% is 76% − 52% = 24 points worse than provisional
Commission points = 24 ÷ 1.5 = 16 points down; commission = 32% − 16% = 16%
The 16% figure is below the 22% minimum, so commission is floored at 22%

Commission is 38% in the good year and 22% in the bad one — both set by the scale's outer bounds rather than the raw formula, which would have paid 40% and 16% respectively. Reading the maximum and minimum is not optional: in both directions here, they are what actually determined the payment.