What is retrocession?

Retrocession is reinsurance bought by a reinsurer. The buyer is still a cedent, just one step up the chain. The seller is the retrocessionaire. The original policyholder is not in the room. The reinsurer is managing its own share of many cedents, often the same peril in the same region, and needs a layer, a share, or a sidecar that will actually pay when several of those files become one event.

It is not a different species of contract. Quota share, surplus, excess of loss, facultative leftover — the shapes repeat. The operations failure is posting a retro limit you cannot cite, or assuming the retrocessionaire will follow a settlement that was never in the original wording.

How it works

The reinsurer's inbound files are now its outbound exposure. Treaty bordereaux, facultative certificates, event aggregates. Retrocession is placed on that portfolio: a catastrophe excess on the reinsurer's own event losses, a quota share of a book, a per-risk excess, sometimes a named facultative retro on a large original risk.

Credit risk is part of the contract. The retrocessionaire has to pay when the reinsurer is paying. Collateral, ratings conversations, and reporting covenants are documents. They are not a feeling about a panel. Reporting to the retrocessionaire is another bordereau problem: same year of account, same event definition, same hours clause, or the recovery will fight.

Do not invent a second website of definitions. Attachment, reinstatement, hours, class, and territory mean what they meant on the original treaty. If endorsement 3 changed the hours clause on the inward cover, the outward retro pack must cite endorsement 3 or show a conflict.

Worked example

A reinsurer holds 30 percent of a property quota share. ACME Construction Ltd, acme.example, takes a warehouse loss of USD 8,400,000 in a named windstorm. Inward share is USD 2,520,000 if the warehouse is on cover. The same event's inward aggregate across the book reaches USD 31,200,000 of the reinsurer's share. The reinsurer's own CAT retro is USD 20,000,000 excess of USD 25,000,000 any one event.

Recovery on that retro is USD 6,200,000 only if the event cut matches the outward wording and if ACME belongs in the inward aggregate. The original ACME schedule still fights TIV USD 42,000,000 versus USD 47,100,000. If the warehouse was never on the inward slip, the retrocessionaire will not want it in the event total. Show both spans. Do not clean the aggregate to make the retro notice look tidy.

What goes wrong

Outward attachment is taken from a pricing memo. Inward hours clause and outward hours clause disagree, and nobody stored either span. A facultative original is dumped into a treaty retro bordereau. Event totals include rows with no event date. The retrocessionaire's denial then becomes an inward capital problem.

Related reading

The parent buyer view is reinsurer operations. Inward shapes are treaty reinsurance. The base definition is what is reinsurance?.