Question 1

After a treaty is commuted, what happens if the actual claims later turn out to cost far more than the commutation payment assumed?

Accepted Answer

The cedent bears the full difference — the reinsurer has been finally released — Commutation is a final release. Whatever claims actually cost afterwards is the cedent's risk, because that is precisely what it agreed to re-assume for the payment received.

Question 2

Why would a reinsurer ever agree to pay a lump sum now instead of simply paying claims as they emerge over the run-off period?

Accepted Answer

It frees the capital held against the reserve and closes its books with certainty — Capital held against a long-tail reserve is capital that cannot be deployed elsewhere. Commutation frees it in exchange for a known, final cost.

Run-off & Commutation

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