The Pricing of Commutations

Pricing commutations is complex; one must consider cash flows, federal income taxes, deferred tax assets, capital requirements, the cost of holding capital, the required return on invested capital, and implied equity flows. Vincent F. Conner and Richard A. Olsen outline a pricing method in their 1991 "Proceedings" paper, "Commutation Pricing in the Post Tax-Reform Era," and Lee Steeneck has adapted their method for this CAS Exam 6 study note on commutations. Conner and Olsen consider expected cash flows and taxes. This paper expands upon their method by considering the other pricing items listed above.