• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Commutations (Core Reading Q)

R

RedCoat

Member
On page 13 of Chapter 12, in the CMP it says:

"Another possibility is for the insurer to commute any outwards reinsurance contracts prior to it commuting the inwards contracts.

This ensures that the insurer does not lose the benefit of any reinsurance recoveries, which may be significant, before it starts to commute its inwards business."

I'm confused - does the second sentence not contradict the first? In my mind, if the insurer commutes their outwards RI first then they DO lose the benefit of recoveries on their yet-to-be-commuted inwards business? E.g. if I have one commercial property left on my book that I plan to commute, but I first commute the 80% QS I have in place covering this. Then a claim comes in, I'm now liable for all of it, making no recoveries? Or am I misinterpreting completely.

Thanks!
 
Think of a commutation as a definite payment now instead of a possible payment (recovery) later. It makes more sense if you think about non-prop.
 
Am I right in saying that "reinsurance recoveries" alludes to the commutation settlement rather than claims?

If so, I think it boils down to this: If the insurer first commutes an inward insurance policy (at full expected cost and then some), then it is protecting itself but also protecting the reinsurer from claims. So the reinsurer then has no incentive to commute the reinsurance at good terms.

Is that right?
 
You must log in or register to reply here.
Back
Top