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📉 '''Sliding-scale commission''' is a [[Definition:Commission | commission]] arrangement in which the percentage paid to an [[Definition:Insurance agent | agent]], [[Definition:Managing general agent (MGA) | MGA]], or [[Definition:Reinsurance broker | reinsurance intermediary]] adjusts up or down based on the [[Definition:Loss ratio (L/R) | loss ratio]] or profitability of the book of business they produce. Rather than paying a flat commission regardless of results, this mechanism ties intermediary compensation directly to [[Definition:Underwriting performance | underwriting outcomes]], creating a shared economic interest between the producing entity and the [[Definition:Insurance carrier | carrier]] or [[Definition:Reinsurer | reinsurer]]. Sliding-scale structures are especially prevalent in [[Definition:Reinsurance | reinsurance]] treaties and [[Definition:Delegated underwriting authority (DUA) | delegated authority]] programs, where the intermediary exercises significant influence over risk selection.

⚙️ The arrangement is typically defined within a [[Definition:Binding authority agreement | binding authority agreement]] or [[Definition:Reinsurance treaty | treaty contract]] through a schedule that maps loss ratio bands to corresponding commission rates. For example, if the [[Definition:Loss ratio (L/R) | loss ratio]] on a treaty stays below 50%, the [[Definition:Ceding company | ceding company]] might earn a 35% commission; if it deteriorates to 70%, the commission drops to 20%. A [[Definition:Provisional commission | provisional commission]] is usually paid upfront at an estimated midpoint, with adjustments calculated after the experience period closes and actual losses are known. The formula often includes a minimum commission floor — ensuring the intermediary covers basic operating expenses — and a maximum cap that protects the carrier's margin even in exceptionally clean loss years.

🎯 Aligning compensation with profitability makes sliding-scale commissions a powerful governance tool. Carriers granting [[Definition:Underwriting authority | underwriting authority]] to MGAs or coverholders use them to incentivize disciplined risk selection and proactive [[Definition:Loss control | loss control]], since every deterioration in the [[Definition:Loss ratio (L/R) | loss ratio]] directly reduces the intermediary's income. In [[Definition:Proportional reinsurance | proportional reinsurance]], sliding-scale commissions help balance the economics between the [[Definition:Ceding company | ceding company]] and the reinsurer, rewarding the cedent for maintaining a profitable portfolio while protecting the reinsurer from subsidizing poor results. For intermediaries, the upside potential of higher commissions on clean books can significantly outperform flat-rate alternatives, making these arrangements attractive to well-managed operations with strong [[Definition:Underwriting | underwriting]] discipline.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Contingent commission]]
* [[Definition:Provisional commission]]
* [[Definition:Loss ratio (L/R)]]
* [[Definition:Profit commission]]
* [[Definition:Proportional reinsurance]]
* [[Definition:Binding authority agreement]]
{{Div col end}}

Definition:Sliding-scale commission - Revision history

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