Category: Reinsurance fundamentals · Reviewed by Amy Price, Account Executive · Last reviewed 2026-06-05
Profit commission in reinsurance is a contractual entitlement of the cedant to a share of the reinsurer’s profit on the treaty, calculated by reference to a profit commission statement that aggregates premiums, losses and expenses over a defined accounting period. It is a mechanism that aligns the cedant’s interests with the underwriting result and rewards good cessions.
Category: Reinsurance fundamentals Also known as: PC, contingent commission Related concepts: reinsurance commission, sliding scale commission, ceded premium
Profit commission is typically expressed as a percentage of the technical profit on the treaty, computed as: ceded premium, less ceded losses (paid and outstanding), less the cedant’s expenses allowance (often a management expense allowance of around 5 per cent), less the reinsurer’s expenses allowance (often 5–10 per cent), less reinstatement premium, plus or minus prior-year deficit carry-forward. A residual profit, if any, is shared between the parties — commonly 20–40 per cent to the cedant.
Where prior-year deficits are carried forward, no profit commission is payable until the cumulative result becomes positive. The carry-forward provision aligns the parties’ interests over the full life of the treaty and discourages opportunistic claims management.
Profit commission is recognised over the contract life under IFRS 17 and FRS 103, with the receivable accrued by reference to the cedant’s best estimate of the ultimate profit. For Solvency II the expected profit commission cash flow is included in the valuation of the reinsurance recoverable, with adjustment for credit risk on the reinsurer.
Profit commission statements are typically prepared by the cedant annually and signed off by the reinsurer. The statement is run over a multi-year period — typically three years — to allow the treaty result to mature. Following the end of the development period, the residual profit (if any) is paid to the cedant.
Profit commission features in most proportional treaties and in some aggregate excess of loss and stop loss treaties. It is uncommon in working layer excess of loss reinsurance where individual claim experience is volatile and the reinsurer prices for adequate margin within the rate.
For Apex clients the existence of profit commission on the cedant’s outwards reinsurance is not visible at policyholder level but affects the cedant’s net cost of risk transfer and ultimately its pricing of original insurance.
An illustrative example: a quota share treaty produces ceded premium of £10m and ceded incurred losses of £5.5m over three accident years. The cedant’s expense allowance is 5 per cent (£0.5m) and the reinsurer’s expense allowance is 5 per cent (£0.5m). Technical profit is therefore £3.5m. At a 25 per cent profit commission rate, the cedant receives £0.875m in addition to the flat ceding commission already paid.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-05. Next review: 2026-12-05.
Apex Insurance Brokers Limited. Authorised and regulated by the Financial Conduct Authority, FRN 724952. Registered in England and Wales, Companies House 07014570. This entry provides general information about UK insurance concepts and is not regulated advice. Consult your insurance broker on your specific position.
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