Ceding commission
A ceding commission is a payment a reinsurer makes to the ceding insurer under a proportional treaty, reimbursing the insurer for the costs of acquiring and servicing the business.
When an insurer cedes a share of its premiums to a reinsurer under a proportional treaty, it has already spent money to write that business, including agent or broker commissions, underwriting, and administration. The ceding commission returns a portion of the ceded premium to the insurer to offset those costs, and it is usually stated as a percentage of the ceded premium.
The ceding commission is a key economic term in proportional reinsurance. It shapes how profit is shared between the two parties, and it can be set on a sliding scale that rises or falls with the actual loss experience of the book. A higher commission benefits the cedent, while the reinsurer weighs it against the losses it expects to pay.
For example, under a quota share treaty with a 30 percent ceding commission, a reinsurer that assumes 1,000,000 dollars of premium would pay 300,000 dollars back to the ceding insurer to help cover its expenses.
Definitions are educational and general, and specific contracts, endorsements, and state rules may modify them. For regulatory guidance, refer to the NAIC or the Insurance Information Institute.