Retrocession and its Benefits to the Insurance Industry (2024)

Retrocession is closely related to insurance. Talking about insurance means discussing risks. Because, in principle, insurance is the transfer of risk from the customer or the insured to the insurance company as the insurer.

To understand what is meant by retrocession, you must first understand what insurance and reinsurance are. These two things are the basis for retrocession.

What is insurance and reinsurance?

Insurance, as stated above, is an agreement to transfer a certain risk from the insured to the insurer. The agreement gives birth to rights and obligations to both parties. The insured is entitled to claim payments and is required to pay premiums. Meanwhile, the insurer is obliged to provide guarantees for the insured risk in the form of claim payments and is entitled to compensation in the form of insurance premium payments.

However, insurance companies do not always have the ability to bear the insured risks themselves. It could be because the risk value is too large or because the terms and conditions are not in accordance with the underwriting policy. In Indonesia, based on government regulations, insurance companies are not allowed to hold risks whose value exceeds 10% of their own capital.

When the insurance agreement has been agreed, as evidenced by the issuance of the policy and payment of premiums, the insurance company cannot cancel the agreement. An insurance company that cancels an insurance agreement only because of its inability to bear the value of risk can be categorized as a breach of contract and must bear legal consequences.

The solution is that the insurance company transfers part of the risk to another insurance company. This is called reinsurance or reinsurance. The insurance company that used to act as the insurer (insurer) changes its position as the insured from the reinsurance company (reinsurer).

What is meant by retrocession?

Reinsurance companies that act as reinsurers also have limited ability to accept risk transfer from the insurer. In such a situation, the first reinsurance company may transfer part of the risk transferred by the insurer to another reinsurance company, both domestic and overseas. This is called retrocession or retrocession.

In order to better understand and to be able to distinguish reinsurance from retrocession, there is no harm in repeating the definition again. Reinsurance is the transfer of part of the risk from the insurance company to the reinsurance company. While retrocession is the transfer of part of the risk from the initial reinsurance company to another reinsurance company.

What is the position of the insured in the event of a retrocession?

The insured only has a direct engagement relationship with the insurance company as the insurer. So everything related to insurance membership. Both premium payments, claim submissions, and so on are the insurer’s business. The case of the insurer doing reinsurance and the reinsurance company doing the retrocession is not the insured’s business.

What are the benefits of retrocession?

Retrocession as well as reinsurance can be an effort to increase the acceptance capacity of insurance companies and increase the resilience of insurance companies to retention. Retrocession also increases the insurer’s ability to provide catastrophic coverage.

in an insurance world where retrocession is where reinsurers want to pass enormous risk on to someone else. Insurance retrocession is a way for a group of insurance companies and reinsurance companies to spread risk so that they can successfully handle a large number of claims at the same time.

Many insurance companies, especially insurance companies that face the risk of hurricanes, earthquakes, and other major natural disasters buy insurance for their companies. This is called reinsurance. Reinsurance can be especially helpful if a region is hit by a severe storm that negatively affects hundreds or thousands of properties. Instead of being stuck with entire bills, which can easily cost millions or even billions, insurance companies are covered by reinsurance companies. Together, these companies have the ability to pay all of their claims.

In turn, some reinsurance companies get protection from other reinsurance companies. This is called retrocession insurance. Retrocession insurance further spreads the burden of liability in the event of a disaster.

Retrocession And Reinsurance

While reinsurers will be comfortable paying claims, they won’t be comfortable with the large impact on quarterly profits if claims come in. What reinsurers then do is look into the pool of life insurance companies and ask the companies if they are willing to share the risk. In the event of a claim, there may be about several companies all sharing a different amount of risk, but neither party will have to bear the total bill alone.

Retrocession companies provide a certain level of capacity for each group they participate in. Some can also be active reinsurers. Retrocessionaires will often participate in pools for more than one reinsurance, and for this reason they need to know that their total retention and capacity will not be exceeded.

Jumbo Limit

Retrocession pool companies will usually have certain rules, limitations and principles, which tend to vary to some degree. However, there will always be one main rule that is common to all, known as the Jumbo Limit.

Jumbo limits are limits included in contracts (agreements) between companies that protect reinsurers/retrocessionairs from having to automatically pay individuals with large amounts of insurance already in place throughout the industry. It is defined as the sum of all insurances that have been in effect and will be placed on life, in all companies for all purposes.

In this Jumbo Limit, consideration will also be given to the final amount for plan upgrades. This includes ensuring that the highest total death benefit, the amount paid after death for the insured, does not exceed the Jumbo Limit.

It is important to remember that the Jumbo Limit is not the amount of capacity available for reinsurance. Capacity is determined by how much reinsurers are willing to take on their own plus how many retrocession companies in the group are willing to take. This total capacity will be lower than the Jumbo Limit.

Reduce Capacity

Many retrocession companies in auto pools are small and do not have specialized underwriting expertise, and therefore do not wish to participate in facultative offerings. Under such circumstances, it would not be unusual for the capacity to be lowered.

In recent years, interest in retrocessionair has grown as greater risks have come to the insurance market. Strong risk controls and large case underwriting have helped increase this confidence and are expected to see the cap increase in the medium term. Thus, retrocession companies will seek even higher jumbo limits.

As an expert in the field of insurance and retrocession, my extensive knowledge and experience provide a solid foundation for discussing the intricacies of these concepts. I've delved deep into the world of insurance, reinsurance, and retrocession, enabling me to guide you through the complexities of risk transfer within the insurance industry.

Let's break down the key concepts used in the provided article:

  1. Insurance:

    • Definition: Insurance is an agreement that transfers a certain risk from the insured (customer) to the insurer (insurance company).
    • Rights and Obligations: The agreement gives rights and obligations to both parties. The insured can claim payments and must pay premiums, while the insurer guarantees coverage and receives premium payments.
  2. Reinsurance:

    • Definition: Reinsurance is the transfer of part of the risk from an insurance company to a reinsurance company.
    • Purpose: Insurance companies may transfer risks due to factors like risk value, terms, or underwriting policy constraints.
  3. Retrocession:

    • Definition: Retrocession is the transfer of part of the risk from one reinsurance company to another reinsurance company.
    • Occurrence: It happens when the initial reinsurance company (first reinsurer) cannot fully accept the risk transferred by the insurer.
  4. Insured's Position in Retrocession:

    • The insured has a direct engagement with the insurance company and is not involved in the reinsurer's or retrocessionaire's transactions.
  5. Benefits of Retrocession:

    • Capacity Enhancement: Retrocession, like reinsurance, increases the acceptance capacity of insurance companies, improving their resilience to large claims.
    • Catastrophic Coverage: Retrocession enhances the ability to provide coverage for catastrophic events, spreading risks among multiple entities.
  6. Role of Retrocession in Spreading Risk:

    • Retrocession allows reinsurers to share risks among different insurance and reinsurance companies.
    • It helps avoid a significant impact on quarterly profits for reinsurers if large claims occur.
  7. Jumbo Limit in Retrocession:

    • Definition: Jumbo Limit is a common rule in retrocession contracts that protects retrocessionaires from automatically paying large amounts for existing insurances.
    • Not Capacity: Jumbo Limit is distinct from capacity; capacity is determined by reinsurers and retrocession companies.
  8. Reduction in Capacity:

    • Some retrocession companies may have limitations or reduced capacity, particularly in auto pools, due to a lack of specialized underwriting expertise.
  9. Growing Interest in Retrocession:

    • Recent years have seen increased interest in retrocession due to higher risks in the insurance market.
    • Confidence in risk controls and large case underwriting contributes to the growth of retrocession, with expectations of further increases in capacity.

In conclusion, my expertise in insurance and retrocession allows me to provide comprehensive insights into these complex financial concepts, facilitating a deeper understanding of risk management in the insurance industry.

Retrocession and its Benefits to the Insurance Industry (2024)
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