Define commutation.

Define commutation.

• A. A Transaction Which Results in the Settlement and Discharge of All Future Obligations Between the Reinsurer and Ceding Company
• B. A Transaction to Transfer Risk to Another Insurer
• C. Policy Cancellation
• D. Payment of Premium in Advance

Answer: (D)

Commutation is a settlement arrangement in which the reinsurer and ceding company agree to terminate all remaining obligations under a reinsurance treaty by making a single payment that reflects the present value of expected future losses and related costs. Once that payment is made, neither side has future claim obligations under the treaty, effectively discharging the contract. This mechanism is used to reduce long-term uncertainty and administrative burden, especially for long-tail lines where future losses are uncertain. The other ideas don’t fit because commutation isn’t simply transferring risk to another insurer (that describes a separate reinsurance or retrocession action), nor is it policy cancellation, nor is it the upfront payment of a premium to obtain coverage.

Commutation is a settlement arrangement in which the reinsurer and ceding company agree to terminate all remaining obligations under a reinsurance treaty by making a single payment that reflects the present value of expected future losses and related costs. Once that payment is made, neither side has future claim obligations under the treaty, effectively discharging the contract. This mechanism is used to reduce long-term uncertainty and administrative burden, especially for long-tail lines where future losses are uncertain.

The other ideas don’t fit because commutation isn’t simply transferring risk to another insurer (that describes a separate reinsurance or retrocession action), nor is it policy cancellation, nor is it the upfront payment of a premium to obtain coverage.