Other Than Life (OTL) Practice Exam

What is retrocession in the context of reinsurance?

1. Arranging a treaty with another insurer

2. A reduction of liability on a risk

3. Transferring risk to a cession

4. A method of underwriting

The correct answer is: A method of underwriting

Retrocession refers specifically to the practice of a reinsurer transferring risk to another reinsurer. In this context, when a reinsurer takes on risk from a primary insurer (the ceding company) through reinsurance, it may choose to further mitigate that risk by passing some of it on to another reinsurer. This is essentially a redistribution of risk among multiple layers of insurance companies, allowing the initial reinsurer to manage its own risk exposure more effectively. Understanding this concept helps clarify why the other options are not accurate in defining retrocession. For instance, simply arranging a treaty with another insurer doesn’t encapsulate the specific nature of retrocession, which involves transferring part of the risk rather than just making an agreement. A reduction of liability on a risk may occur as a result of various strategies, but it does not specifically capture the essence of retrocession. Similarly, transferring risk to a cession implies the transfer from primary to reinsurer, but retrocession focuses on the subsequent transfer from one reinsurer to another. Lastly, while underwriting is a crucial aspect of insurance, retrocession itself is not a method of underwriting; rather, it is a strategy related to managing risk after the underwriting process has taken place. In summary, retrocession is fundamentally about