Distortions that commutation results to the loss triangles for the insurer and reinsurer: insurer distortions include which of the following?

• A. Downward development of paid losses
• B. Ceded reserves fall to 0
• C. Net ultimate losses increase/ decrease, despite a constant gross ultimate
• D. Jump in claims closure count

Answer: (C)

Commutation shifts how losses are allocated between the insurer and the reinsurer, which changes the data you see in the insurer’s loss triangles without changing the total gross losses. The gross ultimate—the total losses before reinsurance—is assumed to stay the same, but the net ultimate—the insurer’s own post-reinsurance exposure—can move up or down depending on the terms and timing of the commutation. That makes the net ultimate in the insurer’s triangle appear differently from period to period even though the gross path is flat.

In practice, this means the observed insurer net losses can increase or decrease due to commutation simply because the liability split and timing have changed, not because the underlying claims costs have necessarily changed. Other distortions like a sudden downward drift in paid losses, reserves dropping to zero, or a spike in closed-claim counts can occur in different contexts, but the fundamental distortion captured here is the net ultimate moving while the gross ultimate remains constant.