Page 47 - M97TB9_2018-19_[low-res]_F2F_Neat2

Chapter 2 Different types of reinsurance 2/7

B Differences between reinsurance and retrocession

As we saw in chapter 1, reinsurance companies buy and sell reinsurance. Reinsurers themselves need to
Reinsurers
purchase reinsurance in order to ensure that they do not assume too much risk either from one particular themselves need to Chapter
location or specific risk. Such reinsurance is known as ‘retrocession’: a transaction whereby a reinsurer purchase reinsurance
cedes or passes to another reinsurer all or part of the reinsurance it has itself assumed. 2
The risk is transferred as follows:

Client Insurer Reinsurer Retrocessionaire

The risks accepted by the insurance industry can be spread by the use of co-insurance to share risks
among many insurers and by the use of reinsurance to lay off or pass part of the insurer’s liability to
reinsurers who in turn can retrocede their own assumed exposures.
Retrocession may be done on a risk-by-risk basis, known as facultative retrocession, or by automatic
reinsurance by way of proportional or non-proportional treaties.

Question 2.2
As a reminder, what is the main advantage of spreading risk as widely as possible?

The difficulty of monitoring accumulation of exposure is accentuated if the monitoring process is
extended into the acceptance of retrocession business.
The retrocession (or ‘second tier’) market is often said to drive the reinsurance market, just as the
The retrocession
reinsurance market sometimes drives the insurance market by bringing about changes in underwriting market is often said to
practices. One way in which retrocessionaires can influence the so-called ‘first tier’ reinsurance market drive the reinsurance
market
is by imposing restrictions on the number of reinstatements available under protections of portfolios of
inwards catastrophe excess of loss reinsurance programmes covering original insurance business, i.e.
the first tier of reinsurance coverage. The result is that reinsurers of that original insurance business are
then unsure whether they should allow reinstatement of a loss in the same event which could exceed the Reference copy for CII Face to Face Training
cover that they are able to buy themselves.

Practice differs between markets since it is quite common to restrict reinstatement for the same event in
the North American market, but less so in all other international reinsurance markets.

Be aware
This environment is in a constant state of evolution and you should keep up to date with the latest changes.

The principal objectives for a reinsurer when deciding whether to buy a retrocession programme are the
same as those of an insurer seeking reinsurance.

Objectives for a
reinsurer when
deciding whether to
buy a retrocession
programme
increase give greater
acceptance stability to
capacity its results

limit the
exposure to loss

A reinsurer will usually have retrocession treaties with a number of different reinsurers. These may be
Lloyd’s syndicates and other insurance or reinsurance companies, which will in turn provide the
reinsurer with additional capacity. In some cases these retrocession contracts are set up in a loose form
of reciprocity: a two way exchange of reinsurance business.

Be aware
Just as we saw in chapter 1 that buyers of reinsurance can also be sellers, you should also note that a seller of a
retrocession may also take on the role of a buyer in a separate transaction.