Cont vs SLiding Scale Comm w/Re to Loss Sens Cont

[captn]

Feldbum calls loss sens contract one of three types( sched P pg 58)

1.) retro rated pols
2.) sliding scale comm dep on LR
3.) PH divididends dep on LR

then he says

contingent commissions do not make a policy loss sensitive. cont commission on direct business have narrow swings, so sensitivity is limited. In addition they are generally one sided - only being paid for good business.

....

So my problem is this:

1.) a contingent commission is of the form:
30% comm if LR < 45%,
20% if < 45 % < LR < 50%,
o% otherwise.

now a sliding scale can be built to be identical to the above coningent comission.

so why should a contingent commission contract not be jsut as loss sensitive as a sliding scale commission contract?

I bet my understanding of contingent vs sliding scale comissions is off - can someone explain? thanks

[Infinity]

Contingent commissions also known as profit commissions work in the following way: If there is a profit (after consideration of an expense margin) then the reinsurer pays back a part of it to the cedent. It is "contingent" upon the profits - No profits no commissions. Hence this is unidirectional - if there is a loss then the cedent does not pay back the reinsurer while the reverse is true. This defies the first principle of the loss sensitive contract that "an increase in losses leads to increase in premiums".

On the other hand Swing rated adjusts itself based on a formula. It might swings on both the directions: higher LR lower commission, & viceversa. You might like to check the remaining 5 criterions for loss sensitive as well. But in general it works.

Getting back to the question that contingent commissions can be worked as a sliding scale doesn't work. If so then it is no longer "contingent" on profitability.

[DeepPurple]

Feldbum calls loss sens contract one of three types( sched P pg 58)

1.) retro rated pols
2.) sliding scale comm dep on LR
3.) PH divididends dep on LR

then he says

contingent commissions do not make a policy loss sensitive. cont commission on direct business have narrow swings, so sensitivity is limited. In addition they are generally one sided - only being paid for good business.



....

So my problem is this:

1.) a contingent commission is of the form:
30% comm if LR < 45%,
20% if < 45 % < LR < 50%,
o% otherwise.

now a sliding scale can be built to be identical to the above coningent comission.

so why should a contingent commission contract not be jsut as loss sensitive as a sliding scale commission contract?

I bet my understanding of contingent vs sliding scale comissions is off - can someone explain? thanks

Your contingent commission is not realistic. Note the bold part of your quote.

Swinging from 0% to 30% is NOT NARROW.

Loss ratio of 44.99 means a contingent commisson of 30% but a loss ratio of 45.01 means a contingent commisson of 20%. THat shounds like hyper sensitivity, not limited sensitivity.


A more common form of contingent commission:

CC equals a return of 25% of the profit in the contract. Profit is defined as

Premium*(1-30%) - losses.

The 30% is in the formula to cover the insurer's (or reinsurer's) expenses. The parameters may of course vary.


I would state this as "PC of 25 after 30" meaning there is a profit commission (aka contingent commission) of 25% of the profit after a 30% expense margin.