View source for Definition:Life retrocession

🔁 '''Life retrocession''' is the practice by which a [[Definition:Life reinsurance | life reinsurer]] cedes a portion of the risk it has already assumed from [[Definition:Insurance carrier | primary insurers]] to another reinsurer, known as a [[Definition:Retrocessionaire | retrocessionaire]]. It functions as a second layer of [[Definition:Risk transfer | risk transfer]] in the life insurance value chain: the original insurer transfers risk to a reinsurer through a [[Definition:Reinsurance | reinsurance]] agreement, and that reinsurer in turn passes a share onward through a retrocession contract. The retrocession market for life risks — encompassing [[Definition:Mortality risk | mortality]], [[Definition:Longevity risk | longevity]], [[Definition:Morbidity risk | morbidity]], and [[Definition:Lapse risk | lapse risk]] — is smaller and more concentrated than its [[Definition:Property catastrophe reinsurance | property-catastrophe]] counterpart, but it plays a vital role in enabling the world's major life reinsurers to manage their [[Definition:Accumulation risk | accumulation exposures]] and optimize their use of [[Definition:Regulatory capital | regulatory capital]].

📊 Retrocession arrangements in the life space take several forms. [[Definition:Quota share reinsurance | Quota share]] retrocession involves ceding a fixed percentage of a defined portfolio — for example, a reinsurer might retrocede 20% of its North American individual life mortality book. [[Definition:Surplus reinsurance | Surplus]] or excess-of-loss structures are also used, particularly for large individual-life risks where a single insured may carry a sum assured high enough to create meaningful concentration risk on the reinsurer's balance sheet. For longevity-exposed portfolios — such as blocks of [[Definition:Annuity | annuity]] or [[Definition:Pension buyout | pension buyout]] business — retrocession can take the form of longevity swap transactions placed with other reinsurers or with [[Definition:Capital markets | capital-markets]] counterparties. Pricing retrocession requires the retrocessionaire to underwrite the reinsurer's portfolio, evaluating the quality of the underlying [[Definition:Underwriting | underwriting]], the geographic and product-line diversification of the ceded block, and the reserving methodology used. The relationship is inherently one of deep trust, since the retrocessionaire relies substantially on the ceding reinsurer's data and risk selection rather than inspecting individual policies.

🛡️ Without an active retrocession market, the largest life reinsurers would face binding constraints on how much new business they could write. [[Definition:Swiss Re | Swiss Re]], [[Definition:Munich Re | Munich Re]], [[Definition:Hannover Re | Hannover Re]], [[Definition:RGA | RGA]], and [[Definition:SCOR | SCOR]] all use retrocession as a core capital-management tool — freeing up capacity to pursue new cessions from primary insurers while keeping their own [[Definition:Solvency ratio | solvency ratios]] comfortably above regulatory minimums under [[Definition:Solvency II | Solvency II]], the [[Definition:Risk-based capital (RBC) | risk-based capital]] framework in the United States, or equivalent regimes. The market also absorbs peak mortality risk — the possibility that a pandemic, natural disaster, or large-scale event causes correlated deaths across many policies simultaneously — and in doing so functions as a critical safety valve for the global life insurance system. Increasing interest from [[Definition:Insurance-linked securities (ILS) | insurance-linked securities]] investors, who access mortality and longevity risk through [[Definition:Catastrophe bond | catastrophe bonds]] and collateralized retrocession structures, has broadened the capital pool available to support life retrocession in recent years.

'''Related concepts:'''
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* [[Definition:Retrocession]]
* [[Definition:Life reinsurance]]
* [[Definition:Quota share reinsurance]]
* [[Definition:Longevity risk]]
* [[Definition:Insurance-linked securities (ILS)]]
* [[Definition:Retrocessionaire]]
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