In the accounting treatment of commutations, the reinsurer eliminates which item?

• A. The reserves
• B. The reinsurance recoverable
• C. The ceded premium
• D. The outstanding losses

Answer: (A)

Commutation ends all future loss payments under a reinsurance contract with a single settlement. For the reinsurer, the exposure tied to that treaty goes away, so the loss reserves allocated to that contract are eliminated. In other words, the future obligation to pay losses is extinguished, which is why the reserves are removed from the reinsurer’s books. The other items don’t reflect the fundamental extinguishing of future loss exposure in the same direct way: reinsurance recoverables would be offset as part of settling amounts due, and ceded premiums and outstanding losses are not the primary liability that gets written off when a commutation occurs.