Cession

AAA

DEFINITION of 'Cession'

The portions of the obligations in an insurance company's policy portfolio that are transferred to a reinsurer. Risk can be transferred to the reinsurer in one of two ways: proportional or non-proportional. Proportional reinsurance is an arrangement where the insurer and reinsurer share an agreed percentage of both premiums and losses. Non-Proportional reinsurance is a system by which the reinsurer pays only when losses are over an agreed-upon amount.

INVESTOPEDIA EXPLAINS 'Cession'

The reinsurance industry has become increasingly sophisticated due to competition within the insurance industry. Reinsurance creates an opportunity for insurer and reinsurers to profit at each others' expense based on the accuracy of the actuarial calculations which price the risk incurred. For example, suppose a reinsurer believes the risk of loss on a certain coverage is less than is actually the case. If an insurer has a more accurate risk model, he can recognize that a reinsurer is undercharging for this coverage. In this case, the insurer simply sells the policies to customers at the higher rate and buys reinsurance at the lower rate, locking in an arbitrage profit.

RELATED TERMS
  1. Catastrophe Excess Reinsurance

    Insurance for catastrophe insurers. Because of the unpredictable ...
  2. Reinsurance

    The practice of insurers transferring portions of risk portfolios ...
  3. Reinsurance Sidecar

    A limited purpose company created to work in tandem with insurance ...
  4. Retrocession

    1. The practice of one reinsurance company essentially insuring ...
  5. Finite Reinsurance

    A type of reinsurance that transfers over only a finite or limited ...
  6. Risk Financing

    The determination of how an organization will pay for loss events ...
Related Articles
  1. Home & Auto

    How An Insurance Company Determines Your Premiums

    Find out how insurers use credit history to build an insurance score and how it could affect your bottom line.
  2. Home & Auto

    Bundle Your Insurance For Big Savings

    Bundling your insurance can save you money and time. Read on to see how get the most out of multiline insurance discounts.
  3. Home & Auto

    The History Of Insurance In America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  4. Active Trading Fundamentals

    Using Logic To Examine Risk

    Know your odds before you put your money on the table.
  5. Options & Futures

    Benefit Issues When Your Employer Goes Bankrupt

    There are some safeguards in place to ensure that health benefits don't just disappear when a plan is canceled.
  6. Insurance

    Homeowners Insurance Losers: States That Pay Most

    Which states charge you the most for homeowner's insurance? Hint: They're regularly featured on the Weather Channel.
  7. Professionals

    Helping Clients Choose Long-Term Care Insurance

    The need for long-term care has become an inescapable (and pricey) issue for retirees. Here's what financial advisors can do to help.
  8. Stock Analysis

    3 Things That Could Hold Intuitive Surgical Back

    Taking a long-term view that favors Intuitive Surgical developer increasing in value, doesn't mean that there are near-term headwinds facing this company.
  9. Insurance

    Life Insurance: How Much Does Age Raise Your Rate?

    If you need life insurance, try to get it before your next birthday. Here's why.
  10. Retirement

    Healthcare: What Are You Really Paying For?

    Long-term care costs rise fast and long-term care providers bundle services together, making it tougher for families to understand what they are paying for

You May Also Like

Hot Definitions
  1. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  2. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  3. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  4. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  5. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  6. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
Trading Center