Commutation Clause
Who triggers the commutation clause? Is it the reinsurer or the insurer that has the option to end the contract and collect the PV of future cash flows?
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Who triggers the commutation clause? Is it the reinsurer or the insurer that has the option to end the contract and collect the PV of future cash flows?
Comments
Either party can propose a commutation. It can also be written into the reinsurance contract after a specified period of time.
Can you please explain what's the commutation initiated by the insurer? the commutation initiated by the reinsurer is to cancel all the reinsurance policies, and return the polices back to insurer, but what is the commutation by insurer?
It just means the insurer proposes a commutation. In a commutation, the insurer always takes back the claim. See this discussion:
https://www.battleactsmain.ca/vanillaforum/discussion/719/spring-2017-18a#latest
so two transactions happen if I understand correctly (no matter who initiates/proposes the commutation):
1- The claims / premiums are returned to the insurer
2- The reinsurer pays the PV of unpaid ceded claims + Risk Margin
Point 1 is not really correct ~ The reinsurer does not return the reinsurance premium.
Your second point is correct
Hello,
After reading the above discussion, my takeaway is that commutation removes the reinsurer liability.
I am a bit confused on how @olidude3121 second point being valid. I though the reinsurer no more has liability and would not need to pay unpaid ceded claims
The reinsurer has to pay back the expected PV of the unpaid to the insurer in order to release the liability, as that is that is what the insurer is owed based on the contract. The insurer then reassumes the risk of run-off development.