Under a proportional treaty, the cession rate says what goes to the reinsurer and says nothing about what the deal earns. The number that decides that is the commission, and it comes in two forms that do not serve the same purpose. The ceding commission reimburses costs; the profit commission shares a result. Confusing them leads to negotiating the wrong line at renewal, which is the most common error on a proportional account.
The ceding commission is justified by a simple imbalance. The cedant has paid its distribution, its issuing costs and its claims handling on the whole of the premium. It passes a gross fraction of that premium to the reinsurer, which has borne none of those costs. Without a correction the cedant would be working at a loss on the ceded share. The commission returns a percentage of the ceded premium, and the placement turns on that percentage far more than on the cession rate, which is often set by the capital need.
It takes two forms. A flat commission is a single rate, say 27%, applying whatever happens. It is simple, it is readable, and it leaves the reinsurer the whole benefit of a good year and the whole cost of a bad one. A sliding scale makes that rate move with the loss ratio of the ceded account: it rises when the account is good, it falls when it deteriorates, within bounds. A typical scale reads as a table, for instance 32% if the ratio comes in at 50%, sliding down one point of commission per point of ratio, to a floor of 22% at 60%.
The scale is not an accounting refinement, it changes who carries what. By cutting the commission when losses rise, it makes the cedant bear part of a deterioration it would otherwise have transferred entirely; by lifting it when the account is good, it returns part of the benefit. It turns a pure proportional split into a curved one, and that is often what makes a treaty placeable when nobody would have taken it flat.
Profit commission answers a different question. It reimburses nothing: it passes back to the cedant a share of the profit the reinsurer actually made on the treaty, once the year has run off. Its principle is that a cedant which underwrites well and handles its claims well creates value for its reinsurer, and that it is healthy for it to receive a share rather than see all of it stay there.
Everything then turns on the definition of profit, and that is where the clause is read line by line. The account starts from ceded premium, deducts ceded losses, the ceding commission already paid, and a reinsurer's expense loading, expressed as a percentage of ceded premium and often around five points. The balance, if positive, is split at an agreed percentage. Two mechanisms complicate it further and must be spotted: the loss carry forward, which requires earlier years' deficits to be made good before any profit emerges, and the run-off period, which delays the calculation by two or three years while losses develop.
The practical consequence is that an announced profit commission is not budgeted as revenue. It arrives late, it depends on a run-off nobody controls, and a loss carry forward can wipe it out entirely even though the year concerned was good. A cedant building its profit and loss account by booking it in advance finds out two years later. The right use is to treat it as what it is: the deferred sharing of a result not yet known.
A cedant cedes 12 million euros of premium in 2026 under a quota share, with a 26% ceding commission and a 20% profit commission after a reinsurer's expense loading of 5% of ceded premium, with a three-year loss carry forward. Ceded losses for 2026 settle at 7.1 million euros after run-off. The 2024 and 2025 years left the account with deficits of 0.9 million and 0.4 million. What does the cedant receive?
The calculation runs in the order of the clause, and that order is what makes the answer. Start from ceded premium, 12 million. Deduct ceded losses, 7.1 million, leaving 4.9 million. Then deduct the ceding commission already paid, 26% of 12 million, that is 3.12 million: 1.78 million remains. Finally deduct the reinsurer's expense loading, 5% of 12 million, that is 0.6 million, giving a balance of 1.18 million for 2026 taken on its own. The cedant might think it collects 20% of that balance, that is 236,000 euros. This is where the loss carry forward comes in, and it changes the answer: the 2024 and 2025 deficits, 1.3 million together, must be made good before any profit appears. The 1.18 million balance is less than 1.3 million, so it does not clear the whole carry forward and no profit emerges. The profit commission due for 2026 is nil, and the residual carry forward of 120,000 euros will be charged against 2027. The lesson for the finance function is that 2026 was a good year technically, with a ceded loss ratio of 59.2%, and that it nevertheless yields nothing under this clause. Revenue booked in advance would have been wrong by 236,000 euros.
- 01The ceding commission reimburses costs already incurred; the profit commission shares a result. They are not two variants of one thing.
- 02On a proportional treaty the placement is negotiated on the commission far more than on the cession rate.
- 03A sliding scale moves the rate with the loss ratio: it hands part of a deterioration back to the cedant, and part of a benefit too.
- 04The profit commission account is read in its order: ceded premium, less ceded losses, less commission already paid, less the reinsurer's expense loading.
- 05The loss carry forward requires earlier deficits to be made good before any profit: a good year can yield nothing.
- 06A profit commission is not budgeted as revenue: it arrives late and depends on a run-off the cedant does not control.