Retrocession
The practice where a reinsurance company transfers some of its reinsurance risk to another reinsurer. This creates a chain of risk sharing that helps spread catastrophic losses across multiple insurance companies globally.
Example
“After accepting earthquake reinsurance from several primary insurers, the reinsurance company used retrocession to transfer 30% of that risk to global retrocessionaires.”
Memory Tip
Think 'RE-RE insurance' - it's reinsurance of reinsurance, passing risk down the chain again.
Why It Matters
Retrocession helps stabilize the global insurance market by spreading catastrophic risks across many companies worldwide. This risk distribution helps ensure that major disasters don't bankrupt individual insurers, protecting policyholders and maintaining insurance availability.
Common Misconception
People often think retrocession weakens the insurance system by creating complexity and dependency chains. In reality, it strengthens the system by preventing any single company from bearing too much catastrophic risk and provides global capacity for major losses.
In Practice
A European reinsurer accepts $500 million in hurricane reinsurance from U.S. primary insurers but wants to limit its exposure to $200 million. Through retrocession agreements, it transfers $200 million to Asian retrocessionaires and $100 million to other European reinsurers. When Hurricane Ian causes $400 million in losses, the original reinsurer pays only $200 million, while its retrocessionaires collectively pay the remaining $200 million according to their agreements.
Etymology
From Latin 're' meaning 'back' and 'cedere' meaning 'to give' or 'yield,' literally meaning to give back or transfer back risk that was already transferred once.
Common Misspellings
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