Navigating profit commission arrangements amidst FRS 102 amendments

With the recent amendments to FRS 102, revenue from profit commission (‘PC’) arrangements may need to be recognised earlier than current practice as the amendments might require a minimum amount to be recognised at inception. This article delves into the world of PC accounting and explores PC structures and how the new accounting standards could impact them.

Understanding performance-based remuneration

Performance-based remuneration is a key part of the remuneration of an insurance intermediary, aligning the intermediary’s interests with that of the insurance carrier. Simply put, these arrangements ensure the intermediary has ‘skin in the game’ with the intermediary sharing in the underwriting profit (or sometimes loss) of the insurer.  

These arrangements can take many forms, and the principles we describe below, using PC as an example, can be applied to other types of remuneration.

The ground rules of PC arrangements

PC arrangements are designed to incentivise MGAs and intermediaries by sharing a portion of the profits (or loss) generated from the policies they manage and/or originate. These commissions are typically calculated based on the underwriting result, loss ratio, or combined ratio of the business underwritten, incentivising intermediaries to focus on quality business. The better the carriers do, the more PC becomes payable.

Common structures

PC structures can vary widely, and so, the terms and conditions of measurement and payment triggers are likely to differ in each agreement. Common examples include:

• Fixed percentage: A set percentage of the underwriting results after adjustments eg UW expenses
• Sliding scale / tiered structures: The percentage varies based on the level of profitability.

PCs might vary based on the cumulative performance over several years rather than just a single financial year or underwriting year to ensure longer term alignment of interests.

Summary of FRS 102 key changes

There are several amendments to FRS 102, effective from 1 January 2026.  Those that are most significant align revenue recognition and lease accounting more closely with the respective IFRS standards (IFRS 15 and IFRS 16). Early adoption is permitted if all the amendments are adopted early.

The key change to revenue recognition is the introduction of a single comprehensive five-step model for revenue recognition for all contracts with customers broadly aligned with IFRS 15, but with some simplifications. The five steps are:

1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognise revenue when (or as) the entity satisfies a performance obligation.

For more information on the five steps and the potential impacts for insurance intermediaries, please see our revenue recognition guide.

Impact on PC arrangements

Whilst most intermediaries accrue for PC using estimation techniques, there are still many in the market that account for PCs on a cash receipt basis or when the lead carrier has accepted the PC calculation, as this is more convenient and less likely to result in reversals and volatility in the results. The new revenue recognition model could significantly impact the timing and calculation of PCs based on the nature of the arrangements and the current revenue recognition policies.

Under the amendments, revenue is recognised when performance obligations are met, which may differ from current practices. The standard requires an entity to recognise revenue as goods and services are transferred to the customer, using the amount that it expects to be entitled to in exchange for the goods and services. The amendments may result in earlier recognition of commission revenue, which as a minimum amount must now be recognised at inception – provided it is highly probable and unlikely to lead to a significant reversal in future periods. Management will need to ensure that there is sufficient data to support the calculations. This will be more challenging to calculate and may require the use of specialists such as actuaries and earlier engagement with carriers on loss projection .

The steps that are likely to pose the greatest challenge for insurance intermediaries are steps 2 and 3.

1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognise revenue when (or as) the entity satisfies a performance obligation.

So, let’s consider these further.

Identify the performance obligations in the contract

• Contracts can contain multiple performance obligations. In addition to introducing new clients to the insurer, an intermediary might perform additional services.
• Insurance intermediaries will need to ensure that they have a clear understanding of the nature of each performance obligation, so that they can assess when each obligation is satisfied and the related revenue is recognised.

Determine the transaction price

• The transaction price might include ‘variable consideration’, ie an element of consideration that is variable or contingent on the outcome of future uncertain events, such as policy cancellations, volume of business, lapses or renewals, and / or claims experience.
• The amendments introduce two methods for estimating the value of variable consideration.

1. The expected value method: The expected value is the sum of probability-weighted amounts in a range of possible consideration amounts.
2. The most likely amount method: The most likely amount is the single most likely amount in a range of possible consideration amounts (ie the single most likely outcome of the contract).

The method that is selected should be the method that provides the best prediction. Variable consideration is also subject to a constraint, and it is included in the transaction price only when it is highly probable that the resolution of the uncertainty will not result in a significant reversal of revenue.

Significantly, management will need to determine if there is a minimum amount of PC that is highly probable and will not result in a significant cumulative revenue reversal. If so, that portion of PC will need to be included in the transaction price, even if the variable amount is not included in its entirety. This is likely to be a change from current practice and will require more judgement than is exercised today.

Example

Consider an intermediary that has delegated authority from an insurer.  The insurer pays a commission for placement and PC based on underwriting profit. This example considers the first evaluation period of the underwriting year.

For many lines of business, PC is not finalised until several years after the initial policies are written, particularly certain Lloyd’s of London business, professional indemnity and medical malpractice books. An intermediary needs to consider whether there is a minimum amount that is not subject to significant reversal that should be recognised sooner.

The 5-step process:

1. Identify the contract with the customer: ABC Intermediary has a contract with XYZ Insurance Company to provide intermediary services. The contract specifies that ABC Intermediary will earn:

• Policy Placement Fee: ABC Intermediary earns 10% for every policy underwritten.
• PC: ABC Intermediary earns a tiered PC based on the underwriting profit:
  • Loss ratio < 50%: 15% of underwriting profitLoss ratio 50%-70%: 10% of underwriting profitLoss ratio 70% – 80%: 5% of underwriting profit

• Identify the performance obligations in the contract:
  • Initial underwriting only (ie no post placement services).

• Determine the transaction price:
  
  • The transaction price includes:
    • Commission: 10% of GWP.
    • PC: Tiered based on the loss ratio.
      
  • Assume:
    • Number of policies underwritten: 1,000 generating £1,000,000 GWP
    • Projected underwriting profit: £100,000 equivalent to say 45% loss ratio

• Allocate the transaction price to the performance obligations
  • The total transaction price of £115,000 is allocated to the single performance obligation:
    • Commission: 10% × £1,000,000 = £100,000
    • PC: 15% × £100,000 = £15,000 (since the loss ratio is expected to be 45%)

• Recognise revenue when (or as) the entity satisfies a performance obligation
  • Commission is recognised when the policies are underwritten.
    
  • Assume that the underwriting history of the last 5 years shows on average the PC paid has been 10%, with loss ratios ranging between 55-68% and in no single year has the loss ratio exceeded 70%.  A minimum amount of 10% would be booked (10% × £100,000 = £10,000) with a further £5,000 subsequently booked at a future date when the PC is determined or becomes reasonably certain.
    
  • This is because £10,000 would be considered highly probable and is not expected to be subject to significant reversal. This would result in an acceleration of the recognition of PC for an entity that today recognises all PC when this is determined/paid/approved.
    
  • For more uncertain and volatile lines of business with longer tails, there might still be an argument to constrain the initial recognition of PC further based on supporting data.

Next steps

We can anticipate several challenges for intermediaries, such as the need for detailed contract reviews so that finance teams fully understand PC arrangements. Finance teams will need to better track PC arrangements going forward and may need to adjust financial reporting systems. This might involve training staff, updating internal controls, and engaging with external advisors and carriers to navigate the complexities of the new requirements.

These changes could affect your profit margins, reward schemes, cash flows, ability to meet financial covenants and pay dividends. The Corporation Tax impact should also not be overlooked, including any transition adjustments. So, it is important to understand the changes and to start planning for the transition now. To ensure compliance, intermediaries should start by conducting a thorough impact assessment. This includes reviewing existing contracts and financial reporting practices to identify the potential impact to the timing of PC recognition.

Whilst 2026 might seem some time away, judging by the implementation costs and challenges IFRS reporters faced with IFRS 15 and IFRS 16, it would be wise to ensure these amendments are on your finance team’s agenda. For calculations that require more judgement it is worth engaging with your auditors earlier to agree the method and approach that will be applied going forward. Giving yourself sufficient lead time is vital for a successful implementation.

 How we can help

Our Financial Accounting Advisory Services team is well-equipped to support insurance intermediaries in navigating the complexities of the amended FRS 102 standards. With deep performance-based remuneration structures, we can help you:

• Assess the impact of the new revenue recognition model on profit commission arrangements.
• Review and unbundle customer contracts to identify performance obligations and variable consideration.
• Provide guidance on accounting for variable and contingent commissions, including minimum recognition thresholds.
• Advise on the implications for key metrics such as EBITDA, tax, and financial covenants.
• Support with accounting papers, policy updates, and financial statement disclosures.
• Collaborate with actuaries and other specialists to develop robust estimation models and documentation.

Early planning and expert guidance are key to a smooth transition. We’re here to help you prepare with confidence.

If you would like advice on any of the issues raised in this article, please contact Satya Beekarry or Michael Marslin.