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💰 '''Ceded commission''' is a payment made by a [[Definition:Reinsurer | reinsurer]] to a [[Definition:Ceding company | ceding company]] as part of a [[Definition:Reinsurance | reinsurance]] arrangement, compensating the primary insurer for the [[Definition:Acquisition cost | acquisition costs]] it incurred in writing the business being transferred. Sometimes called a ceding commission or reinsurance commission, it reflects the reality that the ceding insurer bore the expenses of sourcing, [[Definition:Underwriting | underwriting]], and issuing the original policies — costs the reinsurer would otherwise have had to spend itself to build a comparable book. In [[Definition:Proportional reinsurance | proportional reinsurance]] treaties such as [[Definition:Quota share | quota share]] and [[Definition:Surplus treaty | surplus share]] arrangements, the ceded commission is a central economic term, often expressed as a fixed or sliding percentage of the [[Definition:Ceded premium | ceded premium]].

⚙️ The mechanics of ceded commission vary depending on the treaty structure. Under a flat commission arrangement, the reinsurer pays a predetermined percentage regardless of how the ceded business performs. A [[Definition:Sliding scale commission | sliding scale commission]], by contrast, adjusts the rate based on the actual [[Definition:Loss ratio | loss ratio]] of the ceded portfolio — rewarding the ceding company with a higher commission when losses are favorable and reducing it when claims deteriorate. This profit-sharing mechanism aligns incentives between the parties and is widely used across markets governed by different regulatory frameworks, from the [[Definition:National Association of Insurance Commissioners (NAIC) | NAIC]]-supervised environment in the United States to [[Definition:Solvency II | Solvency II]] jurisdictions in Europe and [[Definition:C-ROSS | C-ROSS]]-regulated insurers in China. From an accounting perspective, the ceded commission typically offsets the ceding company's [[Definition:Deferred acquisition cost (DAC) | deferred acquisition costs]] or is recognized as income over the coverage period, with specific treatment depending on whether the entity reports under [[Definition:US GAAP | US GAAP]], [[Definition:IFRS 17 | IFRS 17]], or local statutory standards.

📊 Beyond its mechanical role in reinsurance economics, ceded commission is a powerful lever in negotiations that shapes the profitability of both parties. For ceding companies — particularly [[Definition:Managing general agent (MGA) | MGAs]] and smaller primary insurers — a generous ceded commission can effectively fund their operating expenses and make it feasible to write business they could not otherwise sustain. For reinsurers, the commission rate reflects their confidence in the ceding company's underwriting discipline and the expected profitability of the portfolio. Regulators and [[Definition:Rating agency | rating agencies]] scrutinize ceded commission structures closely, especially when unusually high commissions may signal that a reinsurance treaty is being used primarily for [[Definition:Financial reinsurance | financial reinsurance]] or capital relief rather than genuine [[Definition:Risk transfer | risk transfer]]. In this way, ceded commission sits at the intersection of reinsurance pricing, accounting treatment, and regulatory oversight.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Ceded premium]]
* [[Definition:Sliding scale commission]]
* [[Definition:Proportional reinsurance]]
* [[Definition:Deferred acquisition cost (DAC)]]
* [[Definition:Quota share]]
* [[Definition:Financial reinsurance]]
{{Div col end}}

Definition:Ceded commission - Revision history

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