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📉 '''Floor''' in insurance and [[Definition:Reinsurance | reinsurance]] refers to a contractual minimum — typically a minimum [[Definition:Premium | premium]], minimum [[Definition:Commission | commission]] rate, or minimum [[Definition:Loss ratio (L/R) | loss ratio]] — below which a value cannot fall regardless of actual experience. The concept appears across diverse structures: [[Definition:Sliding scale commission | sliding scale commission]] arrangements in [[Definition:Proportional reinsurance | proportional treaties]], [[Definition:Experience-rated | experience-rated]] programs, and [[Definition:Profit commission | profit commission]] formulas all frequently incorporate a floor to protect one party from giving back more value than intended when results are unusually favorable.

⚙️ In a typical sliding scale commission within a [[Definition:Quota share | quota share]] treaty, the [[Definition:Ceding company | ceding company]] receives a commission that rises as the [[Definition:Loss ratio (L/R) | loss ratio]] improves, but the [[Definition:Reinsurer | reinsurer]] sets a floor — say, a minimum loss ratio of 50 percent — for purposes of commission calculation, ensuring its own margin is preserved even if actual losses come in well below expectations. Similarly, in [[Definition:Retrospective rating | retrospective rating]] plans common in U.S. [[Definition:Workers' compensation insurance | workers' compensation]] and [[Definition:General liability insurance | general liability]], a premium floor (often called the minimum premium) guarantees the insurer recovers its fixed expenses regardless of how few [[Definition:Claims | claims]] the policyholder incurs. Floors can also surface in [[Definition:Catastrophe bond (CAT bond) | catastrophe bond]] structures, where a floor on the coupon or on the attachment point defines the minimum threshold at which the instrument begins to respond.

🛡️ Without a floor, one party to the contract could face economically irrational outcomes — a reinsurer paying out commissions that exceed the premium it retains, or an insurer collecting so little retrospective premium that it cannot cover [[Definition:Acquisition cost | acquisition costs]] and [[Definition:Administrative expenses | administrative expenses]]. Floors therefore serve as guardrails that keep risk-sharing mechanisms commercially viable across a range of loss scenarios. They are the mirror image of [[Definition:Cap | caps]] (ceilings), and the two are almost always negotiated together. Understanding where a floor sits — and how it interacts with other contractual levers — is essential for [[Definition:Actuarial analysis | actuaries]], [[Definition:Underwriting | underwriters]], and brokers structuring layered or experience-sensitive programs in any major market.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Cap]]
* [[Definition:Sliding scale commission]]
* [[Definition:Retrospective rating]]
* [[Definition:Minimum premium]]
* [[Definition:Profit commission]]
* [[Definition:Proportional reinsurance]]
{{Div col end}}

Definition:Floor - Revision history

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