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Difference between profit commission and reinsurance commission

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asked Oct 22, 2018 in BUS 4027W - Actuarial Risk Management by rohin_jain (1,080 points)

Is there any difference between these two terms?

1 Answer

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answered Oct 29, 2018 by Natank (680 points)

I did not see where in the notes they refer to these two terms. I assume chapter 44 but not sure which page, let me know and I will take a look. As far as I understand the difference (just from googling):

Reinsurance commission, also known as ceding commission, is the amount paid by the reinsurer to assist the insurer in covering their expenses. This usually applies to proportional reinsurance and is how the reinsurer reimburses the insurer for the expenses associated to the ceded risk. The reinsurance commission usually involves the reinsurer paying back the insurer a percentage of the reinsurance premium associated to the expenses for those policies.

Profit commission is also paid by the reinsurer. This is calculated as a percentage of the reinsurer's profit on the book of policies. This is paid by the reinsurer with the idea of incentivising the insurer to write better quality business ie Not sell policies to risky lifes. The insurer shares in a percentage of profit. If the reinsured policies are more profitable, the insurer will get a larger profit commission.

So the main differences is the first is relating to expenses, the second is relating to profit. Hope this is correct and helps.