Spring 2016 #27 (c)
Could you explain more about the impact of commutation on net written premium? The answer says the commutation does not change current NWP, but does commutation reduce the ceded written premium? If so, it would increase the NWP.
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Could you explain more about the impact of commutation on net written premium? The answer says the commutation does not change current NWP, but does commutation reduce the ceded written premium? If so, it would increase the NWP.
Comments
This was tricky because it seems like the reinsurer should "give back" the ceded premium as part of the commutation transaction, and then the primary insurer's NWP should go up by that amount.
The reason the NWP for the prior years doesn't change is that the premium the reinsurer "gives back" is in the commutation price and this is counted as a negative paid loss rather than premium.
I have a question on part b. Keeping it in this thread so that we don't have multiple threads for the same question. Why doesn't the solution consider the tax benefit? As a result of assuming the $3M in reserves, wouldn't that be a $3M*(.35)=$1.05M tax benefit that would increase the reserves?
Commutation price in the range of (1.7M, 1.9M) (from part a) is AFTER the tax benefits to insurer and reinsurer are considered. This price is less than the 2M discounted reserve, so surplus is bound to decrease.