Contingent Profit Commission
Contingent profit commissions are paid by a Reinsurer to an Insurance Company based on estimated net profit of the Reinsurer. The contingent profit commission calculation compares ceded premium to ceded ultimate losses and other expenses specified within the contract, and applies a commission percentage to determine the amount due from the Reinsurer to the Insurance Company.
Contingent profit commissions are estimated using ultimate losses, including incurred but not reported (IBNR) reserves. The estimate must be re-evaluated until all claims are closed under the reinsurance agreement. In policy years when ultimate losses and expenses exceed the ceded premium paid under the contract, a deficit is incurred. The contract may include a provision to carryforward or carryback a deficit, reducing the contingent profit commission due to the Insurance Company.
This OnDemand Learning session provides examples of contingent profit commissions including the journal entries recorded by the Insurance Company.
