Retrocession

What is Retrocession?

Retrocession sits at the furthest end of the risk transfer chain. Just as a primary insurer buys reinsurance to reduce its exposure, a reinsurer may purchase its own reinsurance — called retrocession — to limit its net exposure to any single risk, class of business, or catastrophic event. The reinsurer in this context is called the retrocedant, and the party accepting the retroceded risk is the retrocessionaire. The underlying risk has now been transferred twice: from the original policyholder, to the primary insurer, to the reinsurer, and finally to the retrocessionaire.

Retrocession is structurally identical to reinsurance — the same treaty and facultative forms apply, the same proportional and non-proportional structures are used — but the parties are all professional reinsurers operating in the wholesale market. Most large global reinsurers maintain active retrocession programmes, both to purchase protection and to write retrocession business as a separate line of reinsurance underwriting.

Why Reinsurers Use Retrocession

The primary motivation is concentration management. A large global catastrophe — a major earthquake, a hurricane season, a pandemic — can simultaneously affect a reinsurer's entire book across multiple cedants writing similar risks. Retrocession allows the reinsurer to cap its net exposure to any single event or region, protecting its capital base and ensuring it can honour all its cedant obligations even in extreme loss scenarios.

Retrocession also plays a role in capital management. By ceding a quota share of its portfolio to retrocessionaires, a reinsurer can write a larger gross book than its capital alone would support, operating a similar economic model to the one cedants use when accessing reinsurance capacity. This leverage effect is a key feature of the global reinsurance market's ability to absorb large catastrophic losses.

The Retrocession Market and Spiral Risk

The retrocession market is concentrated among a relatively small number of specialist players — dedicated retrocessionaires, ILS funds, and large reinsurers writing each other's business. This concentration creates interconnection risk: if the same loss circulates through multiple layers of the retrocession chain among the same group of participants, it can generate a "spiral" where the same loss is reinsured and retroceded repeatedly. The London Market experienced a damaging retrocession spiral in the late 1980s and early 1990s, which was a key driver of the Lloyd's market reform. Modern retrocession programmes are designed with spiral avoidance provisions to prevent this dynamic.

Retrocession Documentation and Reporting

Retrocession adds significant complexity to loss reporting chains. When a cedant reports a large loss to its reinsurer, the reinsurer must assess whether that loss pierces its retrocession retention and, if so, advise its retrocessionaires accordingly. Each link in the chain has contractual notification obligations, typically with defined timeframes. Failure to notify retrocessionaires within the required period can prejudice recovery rights. Managing these multi-party notification chains requires systematic document workflows that track each loss across every layer of the programme.