Cession
The transfer of risk from an insurance company (the cedent) to a reinsurance company. This allows the primary insurer to spread their risk and protect against large losses that could threaten their financial stability.
Example
“After writing several large commercial policies, the insurance company arranged a cession with a reinsurer to transfer 60% of the potential liability.”
Memory Tip
Think 'Give up risk' - Cession sounds like 'session' where you give up or hand over something (risk) to someone else.
Why It Matters
Cessions help keep insurance companies financially stable by preventing any single large claim from bankrupting them. This stability ultimately protects policyholders by ensuring their insurance company can pay claims even after catastrophic events.
Common Misconception
Many people think cession means the insurance company is getting rid of all responsibility for a policy. In reality, the primary insurer typically retains some portion of the risk and remains the policyholder's main point of contact for claims and service.
In Practice
An insurance company writes a $10 million property policy for a large factory. To manage their exposure, they arrange a cession where they keep $2 million of risk and transfer $8 million to a reinsurer. If a covered loss of $5 million occurs, the insurance company pays $2 million and the reinsurer pays $3 million, protecting the primary insurer from the full impact.
Etymology
Derived from the Latin word 'cedere' meaning 'to yield' or 'to give up,' reflecting the transfer of risk from one party to another.
Common Misspellings
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See Also
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