Page 92 - M97TB9_2018-19_[low-res]_F2F_Neat2

4/20 M97/February 2018 Reinsurance

C1 Flat-rate commission
The application of a flat-rate commission is commonly applied where a portfolio of business:
• is expected to have very stable results, with the results in any one year not subject to significant
fluctuations; and
• is not to any great extent exposed to variations in profitability that can be influenced by the way
business is ceded to the treaty, as in the case of surplus or facultative obligatory treaties.

The commission will be shown in the reinsurance terms and conditions as a percentage of the gross
premiums that will be ceded to the reinsurance. The percentage will differ on each reinsurance
arrangement depending upon the type of reinsurance, the class of business, previous results,
geographical scope, market conditions and so on, but it should be sufficient to cover the ceding
insurer’s own acquisition costs and make a contribution to its administrative expenses.
However, reinsurers must also bear their own expenses in mind, so we find that flat-rate commissions
Reinsurers must also
bear their own will be lower for facultative business than treaties, and surplus treaty commissions will be lower than for
expenses in mind quota share arrangements. This is mainly due to the additional administration involved in the reinsurers’
4 offices and the greater scope for increased variability of results in surplus treaties.
Chapter Another factor influencing the size of the flat-rate commission will be whether the premiums are ceded

to the reinsurers on an original gross basis or are subject to deductions. It is not uncommon for some
reinsurances to be ceded net of any original commissions. In such circumstances, it can be expected
that the reinsurance commission will be reduced accordingly.

Question 4.4
What do we mean when we refer to cessions being made net of original commissions?

The reinsured may seek an overriding commission from reinsurers as an additional benefit for ceding
business but whether reinsurers will be prepared to allow any such further deduction from the premium
will depend on the potential profitability of the business. Paying a higher total commission based on a
flat-rate basis may be a way of rewarding the reinsured for good underwriting results but it further limits Reference copy for CII Face to Face Training
the reinsurer’s potential for profit. Additionally, the reinsurer has no protection against any deterioration
in the loss experience of the business subject to the reinsurance.
If the reinsurance is also subject to provisions for the establishment of premium and/or loss reserves,
that is funds retained by the insurer, then this too limits the reinsurer’s potential for investment income
on the ceded premiums. Under these circumstances, it can be expected that percentages only at the
lower end of any range would be allowed by reinsurers.
In practice it is not possible to guarantee the perfect stability of any treaty results. Therefore, it may be
Not possible to
guarantee the perfect that the reinsured would look to its reinsurers to provide an extra incentive for good underwriting results.
stability of any treaty They might allow an additional commission based on the profitability of the business, such as a profit
results
commission on a flat-rate basis; alternatively they would grant a commission that directly relates to the
results of the business concerned, that is, a profit commission linked to a sliding scale.

C2 Profit commission (flat-rate basis)
If a treaty is profitable then both the reinsured and reinsurers benefit from the agreement. If it is very
profitable, the reinsured may seek an extra commission from reinsurers for giving them a share in such a
good account. This payment would be called a profit commission and would most commonly be allowed
on stable quota share and surplus treaties. The existence of a profit commission in the treaty would be
seen as an incentive to the reinsured to underwrite a sound, profitable account.
It can be difficult determining a reasonable basis for calculating a level of profit commission which is fair
Several methods of
establishing a profit to both the reinsured and its reinsurers. There are several methods of establishing a profit commission
commission formula formula but there are no hard and fast rules in determining the percentage of commission to be allowed
on any resulting profit. This may be affected by many different factors: