chapter 6 - commission for XL

[DanielZ]

In Chapter 6, page 19, the notes say

"Return commission and override commission are not normally relevant to excess of loss reinsurance. This is because the reinsurer charges the insurer a premium to cover the risk and so a commission payment back to the insurer would be equivalent to simply charging a lower premium."

The notes say earlier on in the chapter that return and override commission *are* relevant for proportional reinsurance, but couldn't you apply the same line of logic as above to proportional reinsurance as well?

Thanks

 

[td290]

With proportional reinsurance, the reinsurance premium will generally be expressed as a percentage of gross premiums and will be ceded in the same proportion as claims. Within this framework, there is less flexibility for determining the premium than there is with excess of loss, where the reinsurer can simply quote whatever premium it thinks is right. The various commissions on proportional reinsurance are there to provide this extra flexibility.

Since they are paid by the reinsurer to the cedant, the reasons given for the commissions normally focus on areas in which the cedant's expenses will be higher than the reinsurer's, e.g. claims handling.

Hope that makes sense.

 

[DanielZ]

Thanks, yes that makes sense