Cession
Cession is the transfer of risk from one insurance company to another, typically through reinsurance arrangements. It allows insurers to spread their risk exposure and maintain financial stability by sharing potential losses with other companies.
Example
“The insurance company made a cession of 40% of its hurricane risk to a reinsurer to protect against catastrophic losses.”
Memory Tip
Think 'session' where insurers 'give up' or 'cede' risk to others in a business session.
Why It Matters
Cession helps insurance companies remain financially stable and continue paying claims even after major disasters. This practice ultimately protects policyholders by ensuring their insurers can meet obligations and stay in business.
Common Misconception
Many people confuse cession with simply canceling insurance or think it means the original insurer is no longer responsible. In reality, the original insurer typically remains liable to the policyholder while transferring risk to reinsurers behind the scenes.
In Practice
ABC Insurance writes $100 million in homeowner policies in Florida but wants to limit hurricane exposure. They arrange a cession with XYZ Reinsurer, transferring 50% of their hurricane risk. If a hurricane causes $20 million in claims, ABC pays the full amount to policyholders but receives $10 million back from XYZ Reinsurer. ABC's net loss is reduced from $20 million to $10 million through this cession arrangement.
Etymology
From the Latin word 'cessio' meaning 'a yielding' or 'giving up,' derived from 'cedere' meaning 'to give way' or 'to yield.'
Common Misspellings
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