Loss participation

Loss participation is the mirror image of profit commission. Profit commission returns a share of the treaty's profit to the cedant; loss participation makes the cedant take back a share of the loss above a loss ratio threshold. It is expressed as a percentage of losses above the threshold, often between ten and thirty percent, and it is capped so it does not wipe out the point of the treaty. It addresses moral hazard on lines where the reinsurer does not see files one by one. The reinsurer accepts continued exposure to severe losses, but will not carry alone the effect of an underwriting policy it does not control. A corridor neutralizes an entire band; participation works progressively and with no upper loss ratio bound, which makes it easier for both parties to read. It very often sits in the same wording as a profit commission. The two then form a symmetrical result sharing that practitioners call a two-way participation treaty.