Retrocession

Example

“After accepting $100 million in earthquake reinsurance from primary insurers, Global Re used retrocession to transfer $40 million of that risk to three other international reinsurers.”

Memory Tip

Think 'Russian nesting dolls' - retrocession is when the reinsurer becomes a 'ceder' too, passing risk to another layer of protection.

Why It Matters

Retrocession helps stabilize the global insurance market by spreading catastrophic risks across multiple companies and countries. This risk distribution ultimately protects consumers by reducing the likelihood of insurer insolvency and ensuring claims can be paid even after major disasters.

Common Misconception

People often think retrocession weakens the insurance system by creating too many layers, but it actually strengthens it by preventing any single company from bearing excessive risk. The multiple layers provide redundancy and stability, not weakness.

In Practice

Titan Reinsurance accepts $500 million in hurricane coverage from various US insurers. To manage this exposure, Titan retrocedes $200 million to European Re, $150 million to Asian Re, and $100 million to Bermuda Re, keeping only $50 million for its own account. When a major hurricane causes $300 million in claims, Titan pays only $30 million (its proportional share), while the retrocessionaires pay $240 million according to their respective shares, and Titan passes these payments back through the chain to the original insurers and ultimately to policyholders.

Etymology

From Latin 'retro' meaning back and 'cedere' meaning to yield or give way, literally meaning to give back or transfer back a portion of assumed risk.

Common Misspellings

Related Terms

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