What is the difference between a reinsurer and a retrocessionaire?

Q:

What is the difference between a reinsurer and a retrocessionaire?

A:

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.

Have a question? Ask us here.

View all questions from Jacques Wong.

Share this:
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 an Insurance Council of BC award in 2015 for academic excellence in the insurance licensing courses and educates insurance professionals through PNC Learning.   Full Bio