Which action is known to distort reserves in Schedule P data?

• A. Commutations
• B. Reinsurance recoveries
• C. Changes in law
• D. Currency fluctuations

Answer: (A)

Commutations are settlements of a block of open claims through a lump-sum payment that releases the insurer (or reinsurer) from any future obligation on those claims. When this happens, the reserves tied to that block are eliminated or dramatically reduced, which directly alters the reported unpaid losses and the observed development pattern in Schedule P. Because Schedule P tracks loss reserves and their development over time, a commutation creates a one-time, non-representative change in the data, making reserves appear higher or lower than the underlying risk would suggest if you didn’t know a commutation occurred.

Reinsurance recoveries, while they affect net losses, are a normal part of the accounting for reinsurance and don’t typically produce the same abrupt, data-shaping distortion as a large commutation. Changes in law and currency fluctuations can influence reserves in some contexts, but they don’t produce the targeted, block-level distortion in Schedule P that a commutation does.