Contracts between an insurance company and its agents can provide for what based upon the profitability of business produced?

Question

Options

• Abase commission
• Bacquisition reinsurance commission
• Ccontingent commission
• Dpersistent ratio commission

• A
  7% (3)
• B
  9% (4)
• C
  82% (37)
• D
  2% (1)

Explanation

Contingent commissions are additional compensation paid to agents by insurance companies based on the profitability (and sometimes volume) of the business they produce - essentially a performance bonus tied to how profitable the policies written by that agent turn out to be.

Why the distractors are wrong:

• A. Base commission is the standard, fixed percentage paid on every policy sold, regardless of profitability.
• B. Acquisition reinsurance commission refers to a ceding commission paid in reinsurance arrangements to offset the original insurer's acquisition costs - unrelated to agent contracts based on profitability.
• D. Persistent ratio commission is not a standard industry term; it conflates "persistency" (policy renewal rates) with profitability, and no such commission type is formally defined this way.

Memory tip: Think of "contingent" as "conditional" - the extra commission is contingent upon the business being profitable. If the agent's book of business performs well (low losses), the insurer rewards them with this bonus, aligning the agent's incentives with the insurer's financial health.

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