What Does Retrocession Mean?
Retrocession is when one reinsurance company has another insurance company assume some of its risks. Like many other types of insurance, this is done for a fee and to reduce the overall risks.
Reinsurance companies transfer risks under retrocession agreements to other reinsurers for reasons similar to those that cause primary insurers to purchase reinsurance. As such, reinsurance companies commonly participate in retrocession in order to prevent the chances of being unable to meet their financial obligations in the event that a disaster occurs and causes many claims to be filed at once.
Even reinsurance companies sometimes need help covering their risks. If a reinsurance company feels that it is too exposed, then it may use retrocession to transfer some of its risks to another reinsurer. Events like tornadoes, hurricanes, monsoons, tsunamis, earthquakes, and acts of war can all cause a tremendous amount of claims to be filed at once. The retrocession is especially helpful for circumstances like these.
This is because it helps the reinsurer from being overexposed to claims. An example of this is when a reinsurance company has a significant amount of risk in an area known for high winds and feels there may be too much risk associated with claims due to wind damage. This helps spread the risk so that no one insurance company will take a significant loss or financial obligations they cannot handle.