Reasons to select Mfad(clms) of 2.5%

Tony88passTony88pass
in CIA.MfAD

Hi Graham,

Based on the battle card answer, the 1st reason is "LOB is commuted to reinsurer and is in runoff", I feel confused:

  1. Once an LOB is commuted, I believe the insurer is not responsible for it anymore, thus they don't need to evaluate it either.

  2. My understanding of "runoff" here is some business insurer ceases underwriting but still hold the responsibility of evaluation.

  3. So it seems a conflict to me having 1&2 at the same time.

Thanks，
Tony

Comments

  • grahamgraham

    Commutation and runoff aren't the same thing. A line of business could be in runoff but not commuted to a reinsurer.

    Commutation agreements can be complicated and may have extra clauses that govern the nature of the arrangement between the primary insurer and reinsurer. My understanding however is that the primary insurer would still value claims for a LOB that is in runoff and has been commuted but then 100% of the liability is ceded to the reinsurer. (The net liability for the primary insurer would be 0.)

    The answer in the BattleCard is from examiner's reports. Reasons for selecting the lowest margin of 2.5%, or something even lower, are given here. See 2015.Fall Q25 part (c):

    If this question comes up again, then anything similar to the answer given in the examiner's report should be acceptable.

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