Reinsurers sometimes share favorable results with the cedent. A profit commission is an amount paid by the reinsurer to the ceding company when the business ceded under a treaty is profitable according to an agreed formula. It aligns incentives and rewards good underwriting.

The formula typically starts with ceded premium, subtracts losses, loss expenses, and a margin for the reinsurer’s cost of capital, then applies a percentage to the resulting profit. Calculations may be made annually or over a multi-year experience account. Deficit carry-forward provisions are common.

Profit commissions appear most often in proportional treaties. They can be a significant component of the economics of the relationship. Clear definitions of the items included in the calculation prevent later disputes when the account is closed.

• Payment from reinsurer to cedent based on treaty profit
• Aligns incentives for quality underwriting
• Calculated by agreed formula after losses and expenses
• Common in proportional reinsurance