The Box under the Desk - Old commutations - 2010-03-17
The Box under the Desk
Scenario #3: Old commutations
A client entered into a dispute with an MGA who was also a reinsurer (two separate legal entities).
The dispute was finally settled and a commutation and a new Quota Share reinsurance arrangement were entered into to resolve matters going forward.
There was a series of unrelated reinsurance contracts which were specifically excluded from the deal.
When the client recorded the commutation they inadvertantly indicated the reinsurer as commuted rather than just the individual contracts. A substantial balance was due at the time of the deal and additional balances developed. The original balances were never submitted to the reinsurer nor were any of the new balances notified or billed.
When we reviewed the files and the documents we discovered the failure. The cedant has little chance of collecting without arbitration/litigation due to the failure to timely notify the reinsurer under the terms of the reinsurance contract.
Lessons:
1. Review your commutation accounting process. One method provides for changing the cession percentages to reduce the amount ceded under a contract for the commuted share. We note this creates two problems. Firstly, the remaining participant’s shares have to be mathematically increased to reflect the reduced cession to the contract. If these appear on cession documents reinsurers will question the adjusted cession percentages. Secondly, there will be no way to determine if the commutation was profitable over time. We recommend continuing the cession to the contract but writing off each month’s (paid) cession against the commutation proceeds, and separately reserving for the ceded reserves/IBNR.
2. Be very careful in recording commutations so that only those contracts affected are adjusted. It is too easy for misunderstandings to compromise future uncommuted balances.
3. Make sure a business person with knowledge of reinsurance operations is involved (and preferably running) the commutation process. Our experience is that using attorneys can create issues that are difficult to manage from a business perspective.
%20(Custom).jpg){kind=logo}
%20(Custom).JPG)
%20(Custom)%20(Custom).jpg)
.JPG)
%20(Custom).JPG)