Klann Pop Quiz Old Answer

This answer referenced the effect of commuting the losses while ignoring how the price of the commutation would impact the taxable income. As such, the revised answer is a better answer to the Pop Quiz.

• The primary insurer's tax benefit _pT should be positive. In a commutation, the primary insurer is taking back a group of claims. That causes a shift in their balance sheet from assets to liabilities, which is a shift from taxable to non-taxable income.
• The reinsurer's tax benefit _reT should be negative. In a commutation, the reinsurer is getting rid of a group of claims. Their balance sheet shift is the opposite from that of the primary insurer. The reinsurer's balance sheet shift is from non-taxable income to taxable income. (So for the reinsurer it isn't really a tax benefit; rather it's a tax penalty.)