Steeneck; UW loss/gain

[Examinator]

According to Steeneck, an effect (for the cedant) of a commutation is that it creates a marginal UW loss with a tax adjustment. Could someone explain how this is an UW loss, and the nature of the tax adjustment?

[Examinator]

Maybe I'm understanding the loss/gain piece. If I, as a reinsurer, am reserving $100 for a reinsured loss, and I agree to sell this commutation to the cedant for $110, I realize an UW loss of $10. For what looked to have been a $100 loss, I paid $110 to the cedant just to get rid of it. Is this correct? I'm still fuzzy on the tax adjustment.

[jk]

Maybe I'm understanding the loss/gain piece. If I, as a reinsurer, am reserving $100 for a reinsured loss, and I agree to sell this commutation to the cedant for $110, I realize an UW loss of $10. For what looked to have been a $100 loss, I paid $110 to the cedant just to get rid of it. Is this correct? I'm still fuzzy on the tax adjustment.If you're reserving at $100, for tax purposes your liability would be less than that, because of the IRS discounting factor mentioned in footnotes 16 and 17. So any reasonable commutation price is going to result in a tax loss.