2013.Fall #29
Part d asks us how the reinsurer's balance sheet would be affected by a commutation.
In a commutation, the reinsurer's loss reserves for that book go to zero, and the reinsurer's paid losses will increase by the amount of the commutation price.
Loss reserves are in the balance sheet, so the balance sheet loss reserves would decrease, and in the income statement, the incurred losses will change by the amount of the (Loss reserves - Commutation Price).
In the solution, it sounds like the Cash part of the balance sheet decreases by the amount of the Commutation Price. Is that correct?
Comments
Yes, the Cash asset is reduced.