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Activity
Can you recall the factors that might affect the percentage of profit commission? List as many as you can.
C3 Sliding scale commission
Profit commissions on a flat-rate basis reward the reinsured for a good result on a particular treaty but
Reward the reinsured
for a good result are an inflexible mechanism. The incentive to do better has a limited appeal and certainly does nothing
for either party should the results be less profitable than expected.
An alternative is to have commissions calculated on a sliding scale basis, which not only automatically
rewards the reinsured for producing a good result but also takes into account the possibility of imposing
a ‘penalty’ in the event of a poorer than expected performance. The reinsured debits the reinsurer with a
provisional commission on premiums paid during the year. This commission would be adjusted at the
end of the year. The adjustment is determined in accordance with an agreed variable table of
commissions linked directly to the loss ratio achieved by the treaty.
4 The loss ratio is calculated according to the following standard formula:
Chapter Earned premium for the year × 100 = loss ratio percentage
Incurred loss for the year
1
In this instance, the figures to be used would be arrived at as follows:
Incurred loss: losses and loss expenses paid by the reinsurer during the year plus outstanding loss
reserve at the end of the year less outstanding loss reserve at the end of the preceding year.
Earned premium: premiums paid for the current year plus unearned premium reserve at the end of the
preceding year less unearned premium reserve at the end of the current year.
There will invariably be a negotiated minimum and maximum rate of commission and the precise terms
of the sliding scale must be clearly set out in the wording of the treaty agreement.
Example 4.12 Reference copy for CII Face to Face Training
Such a wording might be: ‘A 1% increase in the commission rate will be payable for every 1% reduction in the loss
ratio within the limits shown below. A commission of 30% will apply if the loss ratio is 60% or more and a maximum
41% commission will apply if the loss ratio is 50% or less.’
Rate of commission 30% if loss ratio is 60% or more
31% 59% but less than 60%
32% 58% 59%
33% 57% 58%
34% 56% 57%
35% 55% 56%
36% 54% 55%
37% 53% 54%
38% 52% 53%
39% 51% 52%
40% 50% 51%
41% less than 50%
C4 Loss participation or reverse profit commission
While it can be seen that the sliding scale basis goes some way towards rewarding the reinsured for
good results and protecting the reinsurers against a worse than expected performance, it does little in
the event of the results of a treaty being exceptionally poor. A flat-rate profit commission achieves even
less to address this possibility, being purely an extra reward for good performance.
