Retrocessione

Retrocessione, in the context of insurance and reinsurance, is the transfer by a reinsurer of part of the risk it has assumed from an insurer to another reinsurer. The operation expands risk diversification, helps manage capital requirements, and increases capacity to underwrite new business. The parties involved are the cedent or primary insurer (where the risk originated), the reinsurer who originally assumed the risk, and the retrocessionaire, the reinsurer that accepts part of that risk from the former reinsurer.

Retrocessione contracts can be structured in different ways. In proportional retrocession, the retrocessionaire takes a fixed share of premiums and, correspondingly, a fixed share of losses and expenses. In non-proportional retrocession, the retrocessionaire covers losses that exceed a specified amount or exceed a defined risk threshold, regardless of the share of premiums.

There are two main forms. Facultative retrocession covers individual risks or specific contracts, offering tailored terms for particular exposures. Treaty retrocession covers a portfolio of risks under a continuing agreement, defined by the treaty’s scope and terms. Retrocession is a common practice in international reinsurance markets and is subject to regulation and supervisory oversight to ensure solvency, transparency, and proper risk management.

Risks associated with retrocession include counterparty risk, concentration, and reliance on the accuracy of underlying risk data. Proper documentation, capital adequacy, and clear pricing are essential to effective retrocession arrangements.