Commutations and Schedule P

[TheZaha]

I have in my notes that commutations have no impact on schedule p. is this correct?

Doesn't seem to really make sense - wouldn't the ceding company incur quite a bit of net loss after a commutation?

[atkinsmt]

Yeah, from the ceding company's perspective the reserves will shoot up on Sched P since they're shown net of reinsurance, and now they have those reserves back.

[booyah81]

Pop Quiz: Identify 4 ways Sch P impacts other "parts of our syllabus" (for lack of better wording).

Spoiler:

1. RBC
2. IRS reserve discounting
3. SAO (indirectly)
4. IRIS (indirectly)

[givemeapass]

In my notes, it said cash received for commutation should be recorded as negative paid loss. What is the logic?

[PCKS]

Originally Posted by givemeapass

In my notes, it said cash received for commutation should be recorded as negative paid loss. What is the logic?

To identify that these cash are not from regular policies issued but from commutation transactions??? i'm just guessing.

[atkinsmt]

My guess is that because there is a change in reserves when the ceding company reacquires the losses, which will affect U/W income, the negative adjustment to paid losses will offset a huge U/W loss. It wouldn't make sense to take a big hit because their position is virtually the same... just now there's risk of adverse development.

[givemeapass]

Originally Posted by atkinsmt

My guess is that because there is a change in reserves when the ceding company reacquires the losses, which will affect U/W income, the negative adjustment to paid losses will offset a huge U/W loss. It wouldn't make sense to take a big hit because their position is virtually the same... just now there's risk of adverse development.

It makes sense.

[booyah81]

So what is the impact on each party's B/S?

Seller's B/S: cash decreases, liabs in associated loss reserves disappear
Buyer's B/S: consideration recorded as neg paid loss, net loss reserves increase by associated amount

Please add or correct anything.

[JasonScandopolous]

Originally Posted by booyah81

So what is the impact on each party's B/S?

Seller's B/S: cash decreases, liabs in associated loss reserves disappear
Buyer's B/S: consideration recorded as neg paid loss, net loss reserves increase by associated amount

Please add or correct anything.

Sounds right to me.