Cession and retrocession

In insurance, cession means passing all or part of a risk from the insurer, or cedant, to a reinsurer for a reinsurance premium; retrocession is the same move one tier up, when that reinsurer cedes part of what it has accepted to a retrocessionaire. The reinsurer is then a risk taker toward the cedant and a cedant toward its retro panel. A cession can be proportional, the cedant passing on a percentage of premiums and losses, or non-proportional, the reinsurer paying only above a retention; the cession rate measures the share of premium transferred. Retrocessionaires are other reinsurers and, increasingly, ILS funds writing collateralized retro. Reinsurance cession is sometimes confused with a portfolio transfer, which moves the policies themselves to another insurer and takes the transferor out of the relationship, whereas in reinsurance the cedant alone stays liable to its policyholders. And in finance, retrocession also names the share of a fee paid back to a distributor, an unrelated homonym. The cascade spreads very large risks across the global market, so nobody carries a catastrophic exposure alone. The catch is accumulation. Piper Alpha, North Sea, July 6, 1988: the platform blew up, 167 people died, and the loss ran into the London Market Excess of Loss spiral, the LMX, where Lloyd's syndicates were writing each other's retro. The same loss went round the same balance sheets several times. Without sight of other markets' retro programs, a reinsurer can pick up again, through indirect channels, a risk it thought it had moved off its book. That is the spiral, and it made several market crises worse once players found they were reinsuring one another on the same perils.