What is the difference between a reinsurer and a retrocessionaire?

By Jacques Wong | Last updated: January 20, 2018

What is the difference between a reinsurer and a retrocessionaire?

Insurance is it's own beast, so it's easy to forget that it's really a financial product (one of the oldest on the planet, in fact). And in a capitalist economy, anything legal can be bought or sold – and that includes risk.

As purveyors of a financial product, it's no surprise that the insurance company takes some cues from the finance industry. A common and very sensible risk management strategy for investments is constructing a diversified portfolio. To do that, the investor makes sure they don't put all of their dollars into a single type of stock or sector. A diversified portfolio allows the investor to weather market changes and reduce the odds of bankruptcy or catastrophic loss. Basically, if one investment tanks, the other investments ensure a comfortable cushion.

Similarly, insurance companies try to manage their risk portfolios. Their brand of diversification is to cede (pass on) some of their risks to reinsurers from time to time.

A reinsurer can just be a fellow insurance company or a dedicated reinsurance company that focuses on reinsurance business only. Regardless, they will share in the premiums but will also be responsible for paying out their share if a loss occurs. By using reinsurance, insurance companies can shift some risks off of their books and open up capacity to issue more policies (learn more in An Intro to Reinsurance: How It Works and How It Benefits You).

Now, if a reinsurer wants to diversify their risk portfolios by shifting of their own risks, too, they can cede part of their risks to a retrocessionaire. Risks can be mixed and passed on like this any number of times.

In short, a retrocessionaire is simply a reinsurer's reinsurer.

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The Insurance Business Reinsurance

Written by Jacques Wong

Profile Picture of Jacques Wong

Jacques grew up around the insurance industry and began actively participating in 2013. Since then, he has gotten a Level 2 license, won Insurance Council of BC awards in 2015 and 2020 for academic excellence in the insurance licensing courses. He educates insurance professionals through PNC Learning and as a Thought Leader at ReFrame Insurance.

In his day job as an insurance broker, he helps businesses with creative risk management solutions and strategic advice when it comes to insurance.

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