Template binder update: Profit commission clauses

We regularly review binders in place between insurers’ and coverholders’ risk, whether as part of a comprehensive review on exposures, up or down the distribution chain, or for advice in relation to specific concerns or queries on individual issues. Many binders we see use the Lloyd’s market templates and most get left untouched (other than for the commercials across the schedule). 

One of the areas we find that is most often disputed relates to profit commission. These are very useful ways of sharing profits and risks of an insurance portfolio between risk carrier and coverholder, better aligning their respective interests with a view to cementing a more stable and profitable partnership.

At signature/binder entry, these provisions always seem to be lower priority — either they are seen as a long way off or hard to quantify behind baseline commission, and/or unobtainable; as such, they are rarely considered in detail at signature. Where target loss ratios for the book perform better than expected, profit commission entitlements often apply beyond the duration of the binder (especially with long-tail claims) and the provisions can be quite complex to navigate, particularly with delayed claims. 

What and why?

Template binders are out of date in many areas (which this article does not discuss), but operational challenges for profit commission clauses have become more prominent in recent years, particularly in casualty lines with long-tail claims. Traditionally, these clauses stipulate payment 12 months after contract expiry; however, this approach has proved challenging with delayed claims, often requiring clawback provisions that are time-consuming, costly, and potentially damaging to business relationships. 

The LMA (through its Personal Accident Committee, following industry consultation) has now published two new model profit commission clauses:

1. Single clawback: A one-chance saloon calculated after book performance is measured across a longer period. The intention with this is for parties to make the calculation once, settle up and move on.

2. Multipayment: A more flexible option for staged commission payments over time, with ad-hoc adjustments to reflect evolving book performance; this is closest to most profit commission clauses we typically see. 

What is the difference?

The LMA3113A template binder gives the parties significant flexibility but little guidance on what model(s) to use. The template is itself blank on profit commission clauses, and the LMA guidance notes offer limited further support. Typically, profit commission models we see involve a flat, additional rate of commission payable based on book performance across defined measurement periods, often accumulating underwriting years together and then bundling payments after consistent performance over multiple years (as opposed to creating an entitlement to profit commission after one good performing year). Payments are also usually subject to a host of deductions and offset mechanisms, such that one bad year can anchor down subsequent good years. As a result, these can be difficult to manage, hard to calculate, and are often designed to make it very difficult to pay out. Guidance and template clauses are therefore welcome. 

Where?

Updated clauses are available on the LMA’s Wordings Repository and are designed for adoption across all product lines. We understand that these are intended to be aligned with the FCA’s consumer duty.

What’s next?

Watching the LMA ahead for the rest of 2025, we are expecting further model clauses and guidance materials to follow across other areas of the template binder. The intention should be to support further contract clarity and regulatory alignment, and to boost operational efficiency across the Lloyd’s market. Given the wide application and usage of their template binders across the industry, it will be interesting to see if more guidance follows in the future.