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📄 '''Profit-sharing agreement''' is the contractual document that governs how underwriting profits—or losses—on a defined book of insurance or [[Definition:Reinsurance | reinsurance]] business are calculated, allocated, and settled between the participating parties. In practice, this agreement may be a standalone contract or a schedule embedded within a broader [[Definition:Binding authority agreement | binding authority agreement]], [[Definition:Reinsurance treaty | treaty]], or [[Definition:Program business | program]] contract, and it provides the definitive formula that determines whether and when a [[Definition:Profit commission | profit commission]] or profit-sharing payment becomes due.

⚙️ A well-drafted profit-sharing agreement specifies each component of the profit calculation: the [[Definition:Earned premium | earned premium]] base, allowable deductions for [[Definition:Incurred loss | incurred losses]] and [[Definition:Loss adjustment expense (LAE) | loss adjustment expenses]], the [[Definition:Expense ratio | expense]] or management fee load, and the split percentage applied to any remaining surplus. It also addresses critical timing questions—when interim and final settlements occur, how [[Definition:Reserve | reserves]] are valued at each settlement date, and whether an independent [[Definition:Actuarial analysis | actuarial review]] is required. [[Definition:Deficit carry-forward | Deficit carry-forward]] provisions define whether a loss in one accounting year offsets future profits, and for how many years. Dispute-resolution clauses and audit rights ensure both sides can verify the accuracy of reported figures.

🔍 Getting this agreement right carries outsized importance for the financial trajectory of delegated-authority relationships. Ambiguity in the formula—particularly around [[Definition:Reserve | reserve]] methodology or the treatment of [[Definition:Incurred but not reported (IBNR) | IBNR]]—can lead to protracted disputes that damage commercial relationships and stall payments for years. For [[Definition:Managing general agent (MGA) | MGAs]] building their financial models around anticipated profit-sharing income, an unfavorable or poorly understood agreement can undermine business plans and [[Definition:Valuation | valuations]]. Carriers, in turn, use these agreements to calibrate how much risk-reward they share with distribution partners, tightening terms when a program's [[Definition:Loss ratio (L/R) | loss ratio]] drifts or loosening them to attract high-performing producers away from competitors.

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Profit-sharing]]
* [[Definition:Profit commission]]
* [[Definition:Binding authority agreement]]
* [[Definition:Deficit carry-forward]]
* [[Definition:Reinsurance treaty]]
* [[Definition:Contingent commission]]
{{Div col end}}

Definition:Profit-sharing agreement - Revision history

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