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2/8 M97/February 2018 Reinsurance

Retrocession contracts are standard reinsurance contracts and are traded in global reinsurance markets.
Retrocession
contracts are traded London, in common with other international markets, has a substantial retrocession market which
in global reinsurance sometimes can lead to complications. With numerous interwoven relationships, it can be hard
markets
2 sometimes to determine exactly the amount of risk a reinsurer may have accumulated from a particular
Chapter B1 Retrocedants buy from retrocessionaires
geographical location or type of business.

The purchaser of retrocession business is known as the ‘retrocedant’. A retrocedant needs cover to
protect its own writings, or its book of inwards business.

B2 Retrocessionaires sell to reinsurers

The accepter of retrocession business is known as the retrocessionaire. Retrocession is the means by
which a reinsurer can expand its book of business, and obtain business from a country in which it has
no direct acceptances. A European reinsurer could develop a Far Eastern account in this way. You will
appreciate that the retrocessionaire is further removed from the original insurance business than the
reinsurer.

B3 Features of retrocession

When underwriting a reinsurance account to its ceding company, or reinsured, a reinsurer receives little
or no information about the individual risks retroceded to it. The reinsurer is aware of the ceding
company’s underwriting limits and can control the amount of reinsurance cover it provides; this can be
by a limit per risk or per event.
The reinsurer is likely to be accepting reinsurances from a number of different ceding companies,
It can be difficult for
the reinsurer to thereby taking on a considerable accumulation of exposure. This can be exposure to the same risk or to
calculate its total the same event since many of the ceding companies could be hit by the same loss. It can be difficult for
exposure precisely
the reinsurer to calculate its total exposure precisely.
Since retrocession business is more remote from the original business, it becomes more problematic for Reference copy for CII Face to Face Training
the following reasons:
• For proportional retrocessions, the premium received will have been reduced from the original
premium by the deduction of commission, reinsurance commission, overriding commissions and
possibly brokerage.
• For non-proportional retrocessions, the premium received will have been influenced by assumptions
made by the reinsurer concerning risk premium and catastrophe loss provision to which the
retrocessionaire has had no direct influence or input.
• It becomes more difficult for the retrocessionaire to identify its exposures.

Activity
Here is a list, in random order, of the various parties we know are involved in insurance and reinsurance
relationships:

Reinsurer; Cedant; Insured; Retrocessionaire; Insurer; Retrocedant.
Draw a diagram that shows the relationship between each entity, identifying any dual roles. Ask a colleague to review
your diagram to confirm its accuracy.

C Alternatives to conventional reinsurance

Recent capital market valuations and significant aggregated liability and terrorism-related losses have
placed pressure on the insurance market’s ability to meet the growing risk transfer demands of its
largest corporate customers. Such pressure has affected the balance between the supply of, and
demand for, reinsurance capacity and reinsurers often have difficulty in satisfying the demand for cover.
As a result there has evolved a need for there to be alternative ways to transfer risk and its
consequences.