Sliding Scale / Profit Commission Clause
The sliding scale clause links the cedent's ceding commission under a proportional treaty to the actual loss experience: the better the loss ratio, the higher the commission.
- Clause type
- Premium provision
- Origin/Market
- Reinsurance market
- Favours
- Insured
- Negotiability
- Negotiable
Purpose
Under proportional treaties, the cedent typically receives a fixed commission for underwriting and administering the ceded business. The sliding scale clause replaces that fixed rate with a scale that links the commission to the treaty year’s actual loss ratio – the commission rises with favourable loss experience and falls, within defined limits, with unfavourable experience.
Effect and limits
The clause strengthens the alignment of interest, as the cedent participates directly in underwriting results. The commission is usually bounded by a floor and a cap, so that the cedent neither profits excessively from very favourable experience nor faces financial strain from very unfavourable experience.
Negotiation and practice
Key parameters are the reference loss ratio, the slope of the scale, and the upper and lower bounds. Calculation is usually retrospective over several accounting periods, so later adjustments and reserve changes must be factored in.