Reinsurance - Retrocession

Reinsurance companies often also purchase reinsurance, a practice known as retrocession. They typically purchase this reinsurance from other reinsurance companies, but may also retrocede to other insurance companies to spread the risk more widely. A company that accepts such retrocession business is a "retrocessionaire". The reinsurance company that buys reinsurance is the "retrocedent".

The flow of business and premium is as follows: client --> insurer --> reinsurer --> retrocessionaire. Other terms used for each of these entities in this flow of business would be: client --> cedent --> retrocedent --> retrocessionaire.

It is not unusual for a reinsurer to buy reinsurance protection from other reinsurers. For example, a reinsurer that provides proportional, or pro rata reinsurance capacity to insurance companies may wish to protect its own exposure to catastrophes by buying excess of loss protection. Another situation would be that a reinsurer which provides excess of loss reinsurance protection may wish to protect itself against an accumulation of losses in different branches of business which may all become affected by the same catastrophe. This may happen when a windstorm causes damage to property, automobiles, boats, aircraft and loss of life, for example.

This process can sometimes continue until the original reinsurance company unknowingly gets some of its own business (and therefore its own liabilities) back. This is known as a "spiral" and was common in some specialty lines of business such as marine and aviation. Sophisticated reinsurance companies are aware of this danger and through careful underwriting attempt to avoid it.

In the 1980s, the London market was badly affected by the creation of reinsurance spirals. This resulted in the same loss going around the market thereby artificially inflating market loss figures of big claims (such as the Piper Alpha oil rig). The LMX spiral (as it was called) has been stopped by excluding retrocessional business from reinsurance covers protecting direct insurance accounts.

It is important to note that the original insurance company is obliged to pay due claims whether or not the reinsurer reimburses the insurer. Many insurance companies have experienced difficulties by purchasing reinsurance from companies that did not or could not pay their share of the loss. (These unpaid claims are known as uncollectibles.) This is particularly important on long-tail lines of business where the claims may arise many years after the premium is paid.

Read more about this topic:  Reinsurance

Other articles related to "retrocession":

District Of Columbia Retrocession - Virginia Retrocession
... Congress and the Virginia legislature to approve retrocession ... On February 3, 1846, the Virginia General Assembly agreed to accept the retrocession of Alexandria if Congress approved ... A referendum on retrocession was held on September 1–2, 1846 ...
Economy Of Washington, D.C. - History - Retrocession and The Civil War
... See also District of Columbia retrocession and Washington, D.C ... Virginia to take back the land it had donated to form the District a process known as retrocession ...
Government Of The District Of Columbia - History - Retrocession and The Civil War
... See also District of Columbia retrocession and Washington, D.C ... to take back the land it had donated to form the District a process known as retrocession ...