Provisional commission

Textbook case: a 30% provisional commission on 62 million euros of ceded premium, 18.6 million; the adjustment sets the rate at 24%, and the cedant hands back 3.72 million. A provisional commission is the rate paid to the cedant during the year, pending the loss development that will settle the final rate of a sliding scale or profit commission. It is generally set near the expected rate, sometimes slightly below to reduce the risk of a clawback. Adjustments then fall at agreed dates, often twelve, twenty-four and thirty-six months after year end. Each one recalculates the rate on losses known at that point and produces a further payment or a repayment. The problem it solves is cash flow: a cedant cannot wait three years for the remuneration covering its acquisition costs, already paid out when the policy was written. The point to watch is symmetry. A provisional rate set too high produces repayments that arrive at the worst moment, namely when the treaty is performing badly. A prudent finance function reserves for that debt as soon as it becomes likely.