What is an agreement that releases the reinsurer of all its obligations under the original reinsurance agreement for a negotiated consideration as a final settlement?

Question

Options

• AStatutory Act
• BAccounting practices
• Ccommutation
• DNone of the above

• A
  8% (2)
• B
  4% (1)
• C
  83% (20)
• D
  4% (1)

Explanation

Commutation (C) is a formal agreement in reinsurance where both parties - the cedent (original insurer) and the reinsurer - agree to terminate all obligations under a reinsurance contract in exchange for a negotiated lump-sum payment. Once executed, the reinsurer is fully and finally released from any future liability on covered claims, even those not yet reported.

Why the distractors are wrong:

• A. Statutory Act refers to legislation passed by a governing body - it has no role in privately negotiated reinsurance settlements.
• B. Accounting practices describes financial reporting standards (like GAAP or SAP), which govern how transactions are recorded, not how contractual obligations are extinguished.

Memory tip: Think of "commutation" like commuting a sentence - just as a judge can replace a long prison term with a shorter, final one, a commutation agreement replaces ongoing reinsurance obligations with a single, final payment that closes the book on the relationship.

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