Commutation impacts on Schedule P

In the Klann text, it talks about how commutation distorts Schedule P triangles. Does this distortion also flow into Schedule P, Part 1? If so, how would you reflect commutation impacts on Schedule P, Part 1?

Comments

  • The triangles display development patterns, which are being distorted due to removal of a block of business from a certain year. Part 1 does not display development patterns, so it doesn't suffer from the same issue.

  • Using the example in the Klann wiki, if a company commuted PY2013 for a $400, would Part 1 Col 5 (ceded loss payments) increase by $500 for 2013? Is that considered a change to ceded losses due to commutation and not a distortion?

  • It would increase by 400, as per the example.

    I can only think of "distortion" as being related to development patterns. I wouldn't consider the necessary restatement a distortion.

  • Hello, In Fall 2019 Question 26d I understand that a commutation will distort the LDFs calculated from schedule P; however, I am confused on the extra part that it will distort the closure rates. Wouldn't it only distort the Claim counts of the reinsurer? Seems like the question was specific to the ceding insurer so that is why I am confused.

  • Note Klann's statement on page 6:

    ". . . In addition, a commutation will distort the claim closure rates in Part 5 of the reinsurer’s Schedule P, since from the reinsurer’s standpoint a commuted claim is considered to be closed. . . . "

    Yes, primary's claim closures would not be affected. What happened was probably that the exam checkers were given a pointer about claim closures, and they didn't check which side of the agreement the question was asking about.

    We will include a note in the wiki on this question about this point. Thanks for pointing it out.

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