When the opportunity arose to put together an article for AIRROC Matters on the historical perspective of commutations, I agreed as long as: (a) it could be a bit irreverent to the sacred beliefs of our industry, and (b) I could seek collaboration. As you will see, they agreed to both points.
I decided to go back to 1986 when I was hired at Continental Insurance as the Director of Reclamations. You may ask, as I did, “what’s a Reclamation?” (Imitate Groucho Marks “Viaduct? – Why not a Chickena?”) While it was a fancy word for collections, settlements and disputes, it is where I experienced commutations for the first time.
My first commutation was a relatively small one, at the time being just under $600k. I recall that it was comprised of $100k in balances, $350k in undiscounted reserves and $250k of something called IBNR (which for a while I believe meant I Bought No Reinsurance! – I have now come to know that IBNR is determined with a blindfold and a dartboard!). We had to do something called “discount the reserves for the time value of money”. Not really knowing how to do this I found that one of the guys in the office had a piece of shareware software on a 5 inch floppy disk (hey, remember – it was 1986) that allowed you to calculate mortgage rates and present value (the other side had Ms. Pacman). Well, we did it and got the deal done for $575k. We never looked back from there – well maybe a bit! So, to be fair to you, the reader, I reached out to some of my peers to divulge a few of their memorable commutations. Some of the responses were unprintable, while others expressed quite a bit of anger (so much for the “win-win” school of thought!). Others though, hit the mark right on the head.
The first entry comes from someone you all know, but has pleaded anonymity, as have the rest of the contributors.
Some years ago, I was working for a ceding company that was engaged in a dispute with a number of its reinsurers on a particular treaty. An arbitration was pending, but in the spirit of good faith and reconciliation, the parties agreed to meet to consider commuting the treaty participations. The reinsurers had been acting callously and with considerable disregard for their obligations, I thought; I am sure that they thought our company had treated them poorly (or worse) in how the treaty was operated. Nevertheless, old bonds of friendship (and business-like pragmatism) prevailed, and we scheduled our meeting.
The meeting was to take place at the office of the reinsurers’ lawyers. Twelve representatives of the reinsurers were to attend, plus two of their lawyers … and me. Clearly, the logistical planning had been unsound.
I was met in reception by the junior lawyer on the case. It seemed like a ten-minute walk through maze-like corridors to get to the conference room. As he was about to open the door, this lawyer looked me in the eye and said, “Ah, I am now bringing the lamb to the slaughter.” I then entered the room where the twelve reinsurance men were all smiling broadly. They may have been pleased to see me, or optimistic of a conciliatory settlement, but I had no ability to recognize any of that. The two lawyers were also smiling, as if to suggest: “This dispute will put our children through college.” The meeting lasted twenty minutes and was an absolute fiasco.
For the full article, refer to page 30 in the Spring 2015 issue. https://www.airroc.org/assets/docs/matters/airroc%20matters.%20vol%2011%20no%201%20spring%202015.pdf