Reasons for reinsurer not to commute a claim

Anila11

Hi, are there any reasons for reinsurer not to commute a claim or disadvantages? Could it be that there is risk that they don't receive a premium anymore or kills their creditworthiness?

Staff-TS

I think you hit the nail on the head with what you said. If a reinsurer commutes a claim/portfolio, it eliminates the potential for earning additional premiums tied to the contract. This could have an effect on the reinsurers profitability or investment strategy if they were reinvesting those premiums at higher returns over time. Additionally as you mentioned, if a commutation is perceived as the reinsurer offloading liabilities at a steep discount, it might signal financial weakness or reduced solvency of that reinsurer. This could harm the reinsurers credit rating or market reputation.

Outside of what you have already mentioned, other reasons may be:

• Upfront cost of negotiating and executing the commutation might outweigh the benefits, especially if the actuarial evaluation is difficult.
• Taxation and accounting treatments vary by jurisdiction, and a commutation might result in unfavourable tax consequences or less flexibility in reporting reserves.