Commutation / portfolio sale or purchase / LPT

Discussion in 'SP7' started by jensen, Aug 18, 2011.

  1. jensen

    jensen Member

    Hi

    I've come across these three terms:

    1) Commutation
    2) sale and purchase of a portfolio
    3) Liability portfolio transfer

    Are they all the same? If not, how different?

    Thanks.
     
    jensen, Aug 18, 2011
    #1
  2. mattt78

    mattt78 Member

    I think 2 and 3 are much the same, although maybe 2 would sometimes include selling the renewals rights along with the existing liabilities.

    I'd say a commutation is particular type of portfolio transfer, as it relates to a specific reinsurance treaty which is already in place. The commutation effectively ends the reinsurance agreement early (without waiting for the runoff) by estimating the existing liabilities.
     
    mattt78, Aug 18, 2011
    #2
  3. Ian Senator

    Ian Senator ActEd Tutor Staff Member

    Sorry Matt, have to correct you here (but thanks for trying!).

    These are all types of "exit solution", covered in detail in Subject SA3, so don't worry too much about them for ST7 purposes (although yes, I know one got a mention in a recent exam!).

    A commutation is ending future liability in return for a payment now. Each contract is negotiated between insurer and insured. You can't commute compulsory cover.

    A sale and purchase refers to the complete sale of a company to another owner. Takes ages but gives you immediate access to a new market!

    Portfolio transfers are more of a generic term. For example, "novations" completely transfer risk to another body (usually within the same group of companies), but need policyholder consent. Part VII transfers (aka business transfers) are more complex, done under the FSMA 2000.

    I could rabbit on forever, but hopefully this will suffice until you get to SA3. There are other exit solutions by the way, for example, schemes of arrangement.
     
    Ian Senator, Aug 18, 2011
    #3
  4. jensen

    jensen Member

    Thanks, Ian and Matt!

    Just to clarify, say if an insurer wants to stop writing property risks (hence transfer all future liabilities to another party), it's more likely to be a novation? The other two doesn't seem to fit.

    Most likely I am diverging, but once a novation is completed, is the original insurer (the seller) still liable should the new company (the buyer) defaults?

    Cheers!
     
    jensen, Aug 20, 2011
    #4
  5. Ian Senator

    Ian Senator ActEd Tutor Staff Member

    No, it doesn't have to be a novation. Any of the methods may suit, depending on lots of factors (covered in SA3 - for example, legislation, simplicity, reason for exit etc).

    After a novation, the old insurer has no legal liability. That's why it's a complete risk transfer (unlike reinsurance, where default risk remains with the cedant).
     
    Ian Senator, Aug 22, 2011
    #5
  6. zuglubuglu

    zuglubuglu Member

    What about RITC?

    Sorry to revive such an old thread but at times it is easier to look at old questions rather than post a new one.

    RITC is setting up a premium to transfer all outstanding reserves to the following year Annual Venture or another syndicate while commutation is ending future liabilities by paying now.

    How come in page 4 of chapter 12, RITC is included as a commutation. Isn't it closer to transfering a book of business/portfolio transfer?
     
    zuglubuglu, Jan 20, 2015
    #6
  7. jensen

    jensen Member

    I guess it can be thought of a type of commutation ie ending all liabilities from current set syndicate members.
     
    jensen, Jan 21, 2015
    #7
  8. zuglubuglu

    zuglubuglu Member

    Wow Jensen, didn't expect a reply from you after 3 years of opening the thread. Thanks for the reply :)
     
    zuglubuglu, Jan 21, 2015
    #8
  9. jensen

    jensen Member

    No problem. I find it more satisfying responding to threads here than actually studying for the exams :)
     
    jensen, Jan 22, 2015
    #9
  10. DanielZ

    DanielZ Member

    After a commutation, does the ceding insurer still bear ultimate responsibility for any claims?

    As I understand it, the answer is yes - since a commutation is a type of reinsurance rather than a novation.

    Is that right?
     
    DanielZ, Mar 23, 2015
    #10
  11. Darren Michaels

    Darren Michaels ActEd Tutor Staff Member

    Hi DanielZ

    Yes after a commutation the ceding insurer will still bear ultimate responsibility for the liabilities.

    A commutation is not a type of reinsurance though, it is more the opposite. Under a commutation the reinsurance that the ceding insurer has in place with its reinsurer is terminated early in return for a negotiated payment.

    This is why the ceding insurer then has to pay all future claims; its reinsurance is no longer in place.

    Of course even without the commutation and with the original reinsurance still in place the ceding insurer is still ultimately liable for any claims. For example, if the reinsurer defaults then the ceding insurer still has to pay the claims in full.
     
    Last edited: Mar 24, 2015
    Darren Michaels, Mar 23, 2015
    #11
  12. DanielZ

    DanielZ Member

    I thought commutation was a way for the insurer to transfer its liabilities to another party through payment of a lump sum?
     
    DanielZ, Mar 25, 2015
    #12
  13. maz1987

    maz1987 Member

    What you describe is quite a vague transaction, are there are many ways liabilities can be transferred. Furthermore, whenever liabilities are "transferred" there will (almost definitely) be payment of a premium as well. However what you describe certainly isn't a commutation.

    My understanding is that a commutation always describes the action of a ceding insurer cancelling a particular reinsurance cover and therefore retaining all future liabilities.

    Since the reinsurer is passing obligations in respect of these liabilities back to the cedant, the reinsurer will usually also pay some money in the form of a premium back to the ceding insurer.
     
    Last edited by a moderator: Mar 25, 2015
    maz1987, Mar 25, 2015
    #13
  14. Darren Michaels

    Darren Michaels ActEd Tutor Staff Member

    DanielZ

    The Glossary defines a commutation as "The process of prematurely terminating a reinsurance contract by agreeing an amount to settle all current and future claims".
     
    Darren Michaels, Mar 26, 2015
    #14

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