11 - Klann.ReinsComm

Question 1

Define commutation agreement

Answer 1

an agreement between a ceding insurer and the reinsurer that provides for the valuation, payment, and complete discharge of all obligations between the parties under a particular reinsurance contract.

Question 2

identify reasons for a commutation to occur

Answer 2

SEDR
*SOLVENCY: primary & reinsurer may have concerns about each other’s solvency
*EXIT: commutation provides a way for the reinsurer (& primary insurer) to exit a particular market
*DISPUTES: primary & reinsurer may want to end their relationship because of disputes (Ex: over contract provisions)
*RESERVES: primary & reinsurer may disagree over the value of the ceded/assumed reserves (both may think they’re getting a good deal under the commutation)

Question 3

who is the buyer in a reinsurance commutation: primary insurer or reinsurer?

Answer 3

*The primary insurer is the buyer because they are receiving the item in question. (The item in question is the collection of unpaid claims being commuted.)
*Normally, the buyer is also the payer, but here it’s reversed because the item in question is a liability. That means the reinsurer gives money to the primary insurer.