ceding commission

When a cedant hands premium over to a reinsurer under a proportional treaty, it has a fair complaint: it was the cedant who paid the agents, did the underwriting, printed the policies, and answered the phones. The reinsurer is collecting a share of premium it did nothing to acquire. The ceding commission is the reinsurer's way of paying that share of expenses back. It is a payment from the reinsurer to the cedant, expressed as a percentage of the ceded premium, that reimburses the cedant for the cost of having originated the business.

Concretely, suppose a cedant cedes 10 million of premium under a quota share and the ceding commission is 30 percent. The reinsurer pays 3 million back to the cedant, so the reinsurer's net cash from the deal is 7 million of premium, against which it will pay its share of claims. The commission roughly tracks the cedant's own acquisition and administration costs — agent commissions, underwriting, overhead — so that, in effect, the reinsurer participates in the underwriting result while the cedant is made whole for its expenses. Some treaties use a sliding scale or profit commission, where the commission rate rises if the ceded business turns out profitable and falls if it runs badly, sharing the upside.

Ceding commission only exists in proportional reinsurance (quota share and surplus share), because only there is the reinsurer taking a slice of the original premium. Non-proportional covers like excess of loss are priced with their own premium and pay no ceding commission. From the actuary's seat, the ceding commission is a crucial lever: a generous commission can turn an otherwise marginal cession into a profitable one for the cedant, and the negotiation over its level is often where the real economics of a proportional treaty are decided. A frequent misunderstanding is to view ceding commission as 'free money' for the cedant — it is reimbursement of real costs already incurred, not a bonus.