Definition
Retrocession refers to the scenario in reinsurance operations where a reinsurance company (often called the ‘retrocedent’) transfers a portion of the risk it has assumed from an insurance company to another reinsurance company (known as the ‘retrocessionaire’). This is effectively a reinsurance for reinsurers, allowing them to distribute their own exposure risk.
Purpose
The primary purpose of retrocession is to help reinsurers manage risk by dispersing parts of their responsibility to another firm. This prevents the concentration of risk in a single company and can enhance financial stability and capacity to absorb losses.
Operational Context
In the context of operations, retrocession allows reinsurance companies to take on larger policies or higher risks by spreading those risks among multiple parties. Retrocessional arrangements are facilitated through either proportional or non-proportional treaty agreements, depending on how risks are agreed to be shared between the retrocedent and the retrocessionaire.
Legal and Regulatory Framework
Note: As regulations can vary significantly from one country to another, it is crucial for entities involved in retrocessional transactions to comply with local laws and regulations. Entities are often guided by regulations supervised by local governmental agencies like the National Association of Insurance Commissioners (NAIC) in the USA or similar regulatory bodies in other countries.
Example
For instance, a reinsurance company might decide to cede 25% of its assumed $100 million property damage coverage liability to a retrocessionaire. This action distributes the risk in order to prevent heavy loss stemming from a single catastrophic event.
For more detailed guidelines applicable in specific regions or conditions, parties engaged in retrocessional activities are advised to consult legal experts or refer to local government publications concerning insurance and reinsurance operations.
