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. Finite Reinsurance

    A type of reinsurance that transfers over only a finite or limited ...
  4. Retrocession

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

    A limited purpose company created to work in tandem with insurance ...
  6. Policyholder Surplus

    The assets of a mutual insurance company minus its liabilities. ...
Related Articles
  1. How An Insurance Company Determines ...
    Home & Auto

    How An Insurance Company Determines ...

  2. Bundle Your Insurance For Big Savings
    Home & Auto

    Bundle Your Insurance For Big Savings

  3. The History Of Insurance In America
    Home & Auto

    The History Of Insurance In America

  4. Using Logic To Examine Risk
    Active Trading Fundamentals

    Using Logic To Examine Risk

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center