View source for Definition:Retrocession agreement

📋 '''Retrocession agreement''' is a contractual arrangement through which a [[Definition:Reinsurance | reinsurer]] cedes a portion of the risk it has assumed from [[Definition:Cedent | primary insurers]] to another reinsurer, known as a [[Definition:Retrocessionaire | retrocessionaire]]. In essence, it is reinsurance of reinsurance — a critical mechanism that allows risk to be distributed more broadly across the global [[Definition:Capital markets | capital markets]] and insurance sector. Retrocession agreements follow structural conventions similar to direct [[Definition:Reinsurance | reinsurance]] treaties and can take the form of [[Definition:Quota share reinsurance | quota share]], [[Definition:Excess of loss reinsurance | excess of loss]], or other traditional formats.

🔄 The mechanics of a retrocession agreement mirror those of a standard [[Definition:Reinsurance treaty | reinsurance treaty]]. The [[Definition:Retrocedent | retrocedent]] — the reinsurer purchasing protection — transfers a defined share of [[Definition:Premium | premiums]] and [[Definition:Loss | losses]] to the [[Definition:Retrocessionaire | retrocessionaire]] according to the terms, limits, and conditions specified in the contract. [[Definition:Reinsurance broker | Reinsurance brokers]] frequently intermediate these transactions, particularly for large or complex placements that involve multiple retrocessionaires across different markets, including [[Definition:Lloyd's of London | Lloyd's]], Bermuda, and continental European carriers. Retrocession is especially common for [[Definition:Catastrophe risk | catastrophe-exposed]] portfolios, where a single reinsurer may not wish to retain the full peak peril exposure it has accumulated from dozens of [[Definition:Cedent | cedents]]. [[Definition:Collateralized reinsurance | Collateralized retrocession]] backed by [[Definition:Insurance-linked securities (ILS) | insurance-linked securities]] capital has grown significantly, introducing [[Definition:Hedge fund | hedge fund]] and [[Definition:Pension fund | pension fund]] money into this layer of the risk transfer chain.

🌐 Retrocession agreements play a vital but sometimes opaque role in the stability of the global reinsurance market. When retrocession capacity contracts — as it did following the major [[Definition:Natural catastrophe | catastrophe]] loss years of 2017 and 2018 — the effects cascade upward, tightening [[Definition:Reinsurance | reinsurance]] pricing and, ultimately, primary [[Definition:Insurance carrier | insurance]] rates. [[Definition:Rating agency | Rating agencies]] and [[Definition:Insurance regulator | regulators]] pay close attention to a reinsurer's retrocession program because excessive reliance on retrocession, particularly from financially weaker counterparties, can create [[Definition:Counterparty risk | counterparty risk]] that undermines the protective value of the arrangement. For this reason, retrocession credit — the ability to reduce reserves based on ceded retrocession — often requires the retrocessionaire to post [[Definition:Collateral | collateral]] or meet minimum [[Definition:Credit rating | credit rating]] thresholds.

'''Related concepts'''
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* [[Definition:Retrocessionaire]]
* [[Definition:Reinsurance]]
* [[Definition:Retrocedent]]
* [[Definition:Catastrophe risk]]
* [[Definition:Insurance-linked securities (ILS)]]
* [[Definition:Counterparty risk]]
{{Div col end}}