Commutation involves the premature liquidation of contacts of insurance, reinsurance or both. Commutation may be by reference to particular counterparties or contracts with multiple counterparties.

JBA staff have been involved in controlling and organising a wide variety of commutation transactions, including some of the largest commutation-type transactions carried out in the London market involving many subsidiary companies of a world wide insurance group.

As with so much in the field of general insurance the problem consists of a technical evaluation and degree of horse trading. Often following a commutation companies’ internal MI requires modification to take account of the basis on which the commutation was effected – without this step, loss development triangles and related analytical statistics could give misleading results. The commutation is not concluded until the documentation and accounting basis is finalised. In some cases the terms of a commutation deal require monitoring of the claims for a “sleep-easy” period.

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