Deal structure
A vital element of commutations of inwards business is in determining the potential recoverability of any associated reinsurance assets arising. This is a particular problem with IBNR settlements, and often an economic stumbling block with solvent schemes of arrangement. Therefore the precise legal form of the commutation or settlement transaction can have a material impact on the ability of reinsurers to avoid supporting the settlement. There have been many attempts in the market in recent years to overcome the problem, ranging from the creation of trust funds to the treatment of a commutation lump sum as a “pre-payment” of liabilities.
Our analysis suggests that many of the existing structures are legally faulty, though for practical purposes many have succeeded. Over our many years in the industry we have developed a number of financial structures which aim to overcome this problem.
Related links and articles