When asking about a commutation agreement between insurer and reinsurer, the answer said: Insurer would likely take a more optimistic view of the final settlement value of the claims resulting in a lower premium for itself is this statement untrue? because when settling the commutation, the reinsurer should be the one who pay the insurer. Because the reinsurer received the reinsurance premium upfront, and when the contract ends, they have to "refund" to insurer. Reinsurer will have optimistic view about future claims, so that they can pay less when insurer will have prudent view about future claims so they get paid more. Let me know your thoughts? Thanks
Hi Minh Ho Your understanding of a 'traditional' commutation arrangement whereby the reinsurance contract is terminated with the liabilities remaining with the insurer and a commutation payment being made by the reinsurer to the insurer is totally correct. However, this particular question stated that the extended PA liabilities were being commuted to the reinsurer, so instead the liabilities would be transferred to the reinsurer in return for a payment being made from the insurer to the reinsurer. The examiners recognised that the question could have been interpreted either way, and credit was given for both options. This is discussed in the ASET.
I have the same understanding as you do. However, I gave this question to some reinsurance professionals, giving both understandings (commute to the reinsurer or traditional commutation), they think the answer are weird. They said that “commute to” does not mean transfer all risk to insurer. Why don’t the IFOA use the term “loss portfolio transfer” or “run off”?
Commutations, LPTs and run-off are used throughout the Core Reading in various ways (and in some cases in the Principal Terms). Given that is what the IFoA has written and is examined, I would stick wherever possible to that, although in practice the examiners may accept alternative valid definitions. If you have any comments on the setting of the IFoA exams, you'd have to contact the IFoA as we have no involvement in that process I'm afraid.
