What does commutation mean in insurance?
1 A commutation is a commercial agreement between an insurer and its insureds. It is not an actuarial calculation, although actuaries are, or should be, involved at most stages of the calculations and negotiation. This paper is meant to address commutation from a practical perspective.
What is commutation of a contract?
A commutation agreement is an agreement between a reinsurer and a ceding company that details the stipulations in which contractual obligations are discharged. These agreements include ways claims are valued, as well as how to pay remaining losses and premiums.
What is a captive retention?
A captive insurance company formed and owned by a trade or professional association. Attachment point. The point at which excess insurance or reinsurance limits apply. For example, a captive’s retention may be $250,000. This is the attachment point at which excess reinsurance limits would apply.
How does captive reinsurance work?
A reinsurance captive reinsures the risks insured by one or more fronting companies. The fronting company is a licensed, admitted insurer that issues insurance policies to the captive’s parent company without the intention of assuming all (or any) of the risk.
What does captive mean in insurance?
Issue: In its simplest form, a captive is a wholly owned subsidiary created to provide insurance to its non-insurance parent company (or companies). Captives are essentially a form of self-insurance whereby the insurer is owned wholly by the insured.
What is a commutation payment?
A commutation is where you (the worker) and insurer agree to a single lump sum payment. This payment removes the insurer’s liability to pay future weekly payments and/or medical, hospital and rehabilitation expenses for the injury.
What is a commutation offer?
Commutation refers to the right that a beneficiary has to exchange one type of income for another. Commutation is offered to annuitants and to the beneficiaries of life insurance policies so that they might receive a lump-sum payment instead of a series of future payments.
How do captives make money?
Like any business, a captive investor and shareholder enter into a transaction to earn a profit and retain the important ability to manage the operating company’s risks. Once profitable, dividends are generally available within the purview of the department of insurance and its regulatory scheme for shareholders.
Why is it called captive insurance?
A “captive insurer” is generally defined as an insurance company that is wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer’s underwriting profits.
Why do insurance companies use captives?
The Purpose of a Captive To be very clear, the purpose of an insurance company and, therefore, a captive is to pay losses (your own losses) and to afford you (the owner) more control over your risk and any losses that do occur. Put another way, captives are an alternative risk transfer mechanism used to finance risk.