Commutation Working Party report

Document description

Commutation could be described as a means outside litigation, arbitration, repudiation, or liquidation, whereby both parties of a potential dispute can arrive at an acceptable financial settlement. The many reasons why cedant or reinsurer may wish to end a particular contractual relationship are described below. Generalising, it is unlikely that there will be pressure from either party for a commutation in the situation where the financial and administrative integrity of both parties is high. Commutations tend to be associated with weakness on one side or another, to which may be added commutations of treaties with disastrous results or which form part of the settlement of a dispute. Reduction of administration costs is rarely a prime motive. Commutations are an exciting opportunity for the actuarial profession. More and more are being negotiated and there is reason to believe that this trend will continue. Furthermore, because it is clear to all parties involved that estimation and interpretation of reserves is fundamental to negotiating a commutation, there is scope for a far greater degree of actuarial involvement in the commutations that are already taking place. Where there has been actuarial involvement on behalf of either of the parties involved in a commutation, it has been easy to demonstrate added value.