Cession and retrocession

Cession and retrocession describe the successive tiers of risk transfer in the insurance chain. Cession is the operation by which an insurer, called the cedant, transfers all or part of a risk to a reinsurer in exchange for a reinsurance premium. Retrocession is the next tier, by which the reinsurer in turn transfers part of the risks it has accepted to another reinsurer, called the retrocessionaire. This cascading mechanism allows very large risks to be spread across the global market, so that no single actor bears a catastrophic exposure alone. The initial reinsurer thus becomes both a risk taker toward the cedant and a cedant toward the retrocessionaire. This spreading has a virtue, the pooling of major shocks, but also a downside, the opacity of accumulations, since a single risk can return to an actor's portfolio through indirect channels, a phenomenon known as a spiral. Retrocession spirals have historically amplified certain crises, notably after major catastrophes, when actors discovered they were reinsuring one another on the same perils.

A reinsurer that has accepted a large hurricane exposure retrocedes part of it; it then discovers that, through several intermediaries, a fraction of that risk returns to it indirectly, illustrating the spiral risk.

cession, rétrocession, retrocession