Sliding Scale Commissions
A sliding scale commission is an adjustable feature in a reinsurance agreement that rewards the Insurance Company for controlling loss costs ceded to the Reinsurer. An initial provisional ceding commission is recorded. At each financial statement measurement date when estimated ultimate losses are revised, the ceding commission is also revised. The commission varies inversely to the ceded ultimate loss ratio, meaning that as losses increase, the commission earned by the Insurance Company decreases, subject to a minimum earned commission rate. Likewise, when the loss ratio is lower than previously estimated, the Insurance Company earns a higher commission rate, subject to a maximum limit. The sliding scale commission is recalculated until all claims subject to the reinsurance contract are closed.