All about Retrocession Insurance
Have you ever wondered how insurance companies are able to take on a huge amount of risks and still make money in the end? Most probably, the first reason that comes to your mind is that they can invest the amounts paid as premiums and get some profit in the process. Well, that is partly true. But apart from that, insurance companies also have the option of sharing risks with other insurance companies through a process called reinsurance. Then you may ask what happens to the reinsurer in that case? Well, the reinsurer also has the option to share the risks it assumes with another company through a process called retrocession.
Here are some things you need to learn about Retrocession Insurance
Reinsurance is a type of insurance wherein part of the risk taken by an insurance company is taken on by another insurance company. In effect, the initial insurance company buys insurance to protect itself in case a major calamity strikes and it has to pay out a lot of claims all at the same time.
Retrocession is a type of insurance wherein a reinsurance company takes on part of the risk assumed by another reinsurance company. Similar to reinsurance, retrocession also aims to reduce risk and the liability burden of the initial reinsurer by spreading out the risk to other reinsurance companies. This process also protects the initial reinsurer and ensures that there are available funds when a huge amount of claims needs to be paid out.
The following are the key players in a retrocession agreement:
- Client is the person who purchases insurance coverage.
- Insurer is the insurance company from whom the client purchases the insurance.
- Reinsurer is the reinsurance company that takes on part of the risk assumed by the insurer (also referred to as the cedent).
- Retrocessionaire is the reinsurance company that takes on part of the risk assumed by the reinsurer (also referred to as the retrocedent).
Retrocession is common in places that are prone to natural disasters like earthquakes and hurricanes. Due to the prevalence of natural calamities, insurance companies might not thrive if they do not have access to reinsurance and retrocession.
The coverage purchased by the reinsurance company from other reinsurers may be an excess of loss protection for own exposure to catastrophes or an excess of loss reinsurance protection for accumulation of losses in different branches of the business which may be affected by the same catastrophe.
Spiraling occurs when insurance products are traded and moved several times such that insurance companies already lose track of their origins. When this happens, it is possible that a reinsurance company will accidentally reinsure itself. This is similar to derivatives that are frequently traded in the financial sector.
Note that retrocession is not exclusively used in the insurance industry. It may also refer to the ceding of a territory due to a political agreement, political agitation or a treaty. In this case, the territory is returned to its original owner and all claims on the territory are abandoned.
If you are an insured client and your insurance company availed of reinsurance or retrocession, do not worry because your agreement with your insurance company shall remain valid and binding even if the reinsurer or the retrocessionaire fails to reimburse the insurance company.