Ceding commission

Ceding commission, or reinsurance commission, covers the amounts the reinsurer pays back to the cedant under proportional treaties, in return for the business ceded. It is quoted as a percentage of ceded premium. A 40% quota share on 50 million euros of premium cedes 20 million; at a 30% commission the cedant gets 6 million back, which pays part of its acquisition costs. It takes several forms that work together. The ceding commission proper compensates the cedant for the costs of producing and managing the portfolio, meaning acquisition, underwriting and administration; the reinsurer benefits indirectly, since it receives a proportional share of the premiums. An overriding commission, or override, may be added to pay an intermediary or to recognize the particular value of a source of business. The profit commission hands the cedant a fraction of the profit the treaty actually generates, which rewards quality underwriting and low loss experience. It is often confused with brokerage, which pays the reinsurance broker and comes out of the premium remitted to the reinsurer, whereas ceding commission goes back to the cedant. Taken together, the commission terms weigh heavily in the negotiation and in the economics of the treaty. Their level shows the portfolio's expected profitability, and also the balance of power between cedant and reinsurer, which depends on the market cycle and the quality of the relationship.