In pricing a commutation, which item is not typically considered?

• A. Reflect motives for entering into commutation
• B. Estimate the future claim payments
• C. Apply a discount factor
• D. Estimate the timing of the payment

Answer: (A)

Pricing a commutation is a present-value valuation of the future cash flows the insurer would take on. The essential steps are to estimate what payments will be made in the future, consider when those payments will occur, and discount them back to today using an appropriate discount rate. The timing of each payment matters because earlier payments have a higher present value, and the discount factor captures the time value of money and risk.

Motives for entering into the commutation don’t change the actual cash flows or their timing, so they don’t affect the financial value being computed. They’re relevant for negotiations or non-financial considerations, but they don’t alter the present value calculation.