Commutations: Tax Effect (EASY version)
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Calculate the change in taxable income for both the insurer and reinsurer due to the commutation.
| quota-share % |
xx% |
| commutation price |
xxx,xxx |
| discount factor - primary insurer |
0.000 |
| discount factor - reinsurer |
0.000 |
| REINSURER'S carried loss reserves (prior to commutation) are higher than the INSURED'S carried (ceded) reserves by |
xx% |
| primary insurer DIRECT (gross) loss reserve |
x,xxx,xxx |
Formulas
change in taxable income for primary insurer
= price – (pR-c) x d1
change in taxable income for reinsurer insurer
= (reR-g) x d2 – price
Notation
price
= commutation price
pR-c
= CEDED carried reserve for primary insurer BEFORE commutation
reR-g
= GROSS carried reserve for reinsurer BEFORE commutation
d1
= discount factor for primary insurer
d2
= discount factor for reinsurer
Solution:
| primary insurer change in taxable income |
---- |
| pR-c = |
---- |
| reinsurer change in taxable income |
---- |
| reR-g = |
---- |
