Ceding Commission

Ceding commission is the allowance a reinsurer pays to the primary insurer — the ceding company — to compensate it for the expense of producing and servicing the business it hands over. When an insurer cedes premium under a proportional treaty or facultative arrangement, it has already paid agent commissions, premium taxes, and administrative costs to acquire those policies. The ceding commission returns a share of those costs so the primary carrier is not out of pocket for expenses on premium it no longer keeps.

For a small-business buyer, ceding commission never appears on a policy, but it is an important lever in how the reinsurance economy works. The size of the ceding commission is negotiated and effectively transfers profit between the two parties: a generous ceding commission rewards the primary insurer for bringing profitable business, while a lower one lets the reinsurer keep more margin. Some treaties use a sliding-scale or profit-sharing ceding commission that rises when the ceded book performs well and falls when losses run high, aligning both companies' incentives to underwrite carefully.

A practical nuance is that ceding commissions apply mainly to proportional reinsurance, where premium and losses are split by percentage. In non-proportional excess-of-loss deals, the reinsurer is paying only for losses above an attachment point, so a traditional ceding commission usually does not apply. The ceding commission also interacts with a carrier's expense ratio and reported surplus, which is why finance and reinsurance teams treat it as a key term in every treaty negotiation.