COMMUTATIONS AND NEGOTIATED SETTLEMENTS
INTRODUCTION: TERMINOLOGY AND DEFINITIONS
Defining a commutation
The essence of a commutation agreement is that ordinarily, in exchange for a payment by the reinsurer to the reinsured, both parties are released from all future liabilities under the reinsurance contract. Importantly, a commutation agreement is a separate contract from the reinsurance contract. It is a separate contract which (a) kills the reinsurance contract and (b) creates a new liability. This has implications for outwards reinsurance or retrocession recoveries.
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