A commutation clause is a provision in a reinsurance contract that allows the reinsurer to make a lump sum payment to close the reinsurance contract.
By making this payment, the reinsurance agreement ends, and the reinsurer is absolved of all future involvement with any claims or policies covered under the reinsurance agreement.
The parties may want to end the contract for a variety of reasons. Some of the most frequent motivations include:
- Exit a particular line of business.
- Concerns about the solvency of the other party
- Relationship has frayed for other reasons