Cost of Profit Commission:

Simple Quantification
Earthquake exposed California property pro-rata treaty
LR = 40% in all years with no EQ
Profit Comm when there is no EQ = 50% x ($1 of Premium
- $0.4 Loss - $0.30 Commission - $0.1 Reinsurers Margin)
= 10% of premium
Cat Loss Ratio = 30%.
10% chance of an EQ costing 300% of premium, 90%
chance no EQ loss
Expected Cost of Profit Comm =
Profit Comm Costs 10% of Premium x 90% Probability of No
EQ
+ 0% Cost of PC x 10% Probability of EQ Occurring = 9% of
Premium