Steeneck

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Author:
Esaie
ID:
26420
Filename:
Steeneck
Updated:
2010-07-12 08:58:20
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Exam6
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  1. Commutation
    De finition: Process where the future value of an unpaid claim(s) and associated expenses is 'current valued, taking into account fi nancial and non- financial aspects, to accelerate payment and close the case(s)
  2. Buyer / Primary Ceding Company's Attraction To A Commutation
    • 1. Accelerated settlement of the obligation
    • 2. Improvement in current "wealth" using entity's perception of value of cash over non-cash assets
    • 3. Cash flow for reinvestment or liquidity to deploy for other purposes
    • 4. Certain immediate amount is substituted for an uncertain future amount
    • 5. Possible admin cost saving associated with monitoring and collection efforts
    • 6. Creating a marginal underwriting loss and federal income tax marginal adjustment
  3. Seller / Reinsurer's Attraction To A Commutation
    • 1. Accelerated settlement, often times ending relationship with buyer
    • 2. Improvement in perceived "wealth" when considering fi nancial and non- financial aspects
    • 3. Limited attractive cash flow alternatives
    • 4. A certain result, not subject to future events such as contract remediation or retroactive legislation or judicial results
    • 5. LAE administrative expense savings
    • 6. Creating a marginal underwriting gain with a probable adverse current tax consequence
  4. Ambivalence Point
    • 1. De finition: Point estimate monetary figure representing the highest value the seller is willing to pay the buyer
    • 2. Formula: AP = (AP - Tax Basis Reserve) * Tax Rate + NPV Booked Reserve
  5. Steps to Reach US Ambivalence Point
    • 1. Calculate PV of loss
    • 2. Calculate tax basis reserve as total loss * tax basis discounting factor
    • 3. Calculate amount of unwind = Step 1 - Step 2
    • 4. Calculate PV of Step 3
    • 5. Calculate PV of the unwinding of the discount times the US tax rate
    • 6. Calculate basis of seller's ambivalence point, i.e., cost not to commute = Step 1 - Step 5
    • 7. US Ambivalence Point = (Step 6 - Step 2 * r) / (1 - r) where r = US Tax Rate
  6. Steps to Reach Canadian Ambivalence Point
    • 1. Calculate PV of Loss
    • 2. Calculate Tax Basis Reserve = min(Booked Reserve, Step 1 + Provision for Adverse Deviation) * 95%
    • 3. Marginal Taxable Income = Step 2 - Step 1
    • 4. After Tax Income Generated = Step 3 * r
    • 5. Canadian Ambivalence Point = (Step 1 - Step 3 * r) / (1 - r), where r = Canadian Tax Rate

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