Category: Reinsurance fundamentals · Reviewed by Matt Bartlett, Director · Founder · Last reviewed 2026-06-05
Retrocession is the reinsurance of a reinsurer. It is the contract by which a reinsurer (acting as a cedant) transfers part of the risk it has assumed under one or more reinsurance contracts to a further reinsurer, known as the retrocessionaire, in exchange for a ceded premium.
Category: Reinsurance fundamentals Also known as: retro, reinsurance of reinsurance Related concepts: retrocessionaire, reinsurance, reinsurer Related legislation: Solvency II Directive 2009/138/EC; PRA Insurance Rulebook
Retrocession is the layer above reinsurance in the risk-transfer hierarchy: primary insurer → reinsurer → retrocessionaire. From the retrocessionaire’s perspective the contract is simply reinsurance, but viewed from the original insurance contract it represents a second tier of risk transfer. Retrocession enables reinsurers to manage their net exposure, smooth their results and protect against peak catastrophe losses in the same way that reinsurance enables primary insurers to manage theirs.
Retrocession is most commonly purchased on a non-proportional basis — catastrophe excess of loss, aggregate excess of loss or stop loss — and is particularly important to the global property catastrophe market, where peak risks (Florida wind, California earthquake, Japan typhoon, North Atlantic hurricane) are concentrated among a relatively small number of reinsurers.
A retrocession contract is governed by the same body of law as a reinsurance contract: general principles of English contract law, the Marine Insurance Act 1906 where applicable, and the duty of fair presentation under the Insurance Act 2015 [1]. Solvency II treats retrocession as risk-mitigation in the same way as inwards reinsurance, with the same requirements for legal effectiveness, basis risk and counterparty credit assessment [2].
The PRA’s expectations on the use of retrocession by UK reinsurers are set out in the PRA Insurance Rulebook and in supervisory statements on the prudent use of reinsurance and on insurance special purpose vehicles [3].
In practice retrocession is purchased annually at the major renewal dates (1 January principally for global property cat retro, with smaller renewals at 1 April, 1 June, 1 July). The retro market is dominated by a relatively small number of specialist retrocessionaires (including dedicated retro writers, insurance-linked securities and sidecar vehicles, hedge fund-backed reinsurers and the Lloyd’s market).
Retro capacity has historically been more volatile than reinsurance capacity: a single major catastrophe (such as Hurricane Katrina in 2005, or the 2017 Atlantic hurricane season) can withdraw a significant proportion of retro capital, leading to sharply higher rates at the next renewal. The ‘retro squeeze’ is a recurring market phenomenon.
Cedants are concerned with the retro arrangements behind their reinsurers because the failure of a retro programme can impair the reinsurer’s ability to pay. In practice, however, primary cedants do not contract with retrocessionaires (there is no privity) and must rely on the reinsurer’s solvency and the PRA’s supervision.
An illustrative example: a reinsurer accepts £100m of catastrophe risk across a number of treaty placements. To protect itself the reinsurer purchases a retro programme of £80m excess of £20m for catastrophe losses, placed in five layers across the London, Bermuda and continental European retro markets. Following a £75m catastrophe loss, the reinsurer’s net retention is £20m; the balance of £55m is recovered from the retrocessionaires.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-05. Next review: 2026-12-05.
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