Insurance companies enter into commutations with their reinsurers for many reasons – both at their request and the request of the reinsurer. Some of the reasons insurers may commute include:

• collecting from a reinsurer that is impaired or in runoff,
• collecting from a reinsurer that disputes coverage or is otherwise obstructive in paying, accelerating the receipt of a profit commission,
• accelerating the recognition of GAAP income on retroactive contracts,
• or the reinsurance contract included a mandatory commutation date.

The reinsurer may commute to eliminate long tail liabilities – elimination of which can generate underwriting income or reduce RBC required by rating agencies; reduce claims maintenance on long-tail contracts; or, at the request of the insurer, maintain a good relationship with the cedent.

Just as the original reinsurance contract included a risk load for the reinsurer, insurers need a risk load to cover the risk of the reacquired liabilities. This session will give examples of commutation scenarios to illustrate these points and look at the magnitude of risk load to reacquire the liabilities.