Retrocession is reinsurance purchased by a reinsurer. It lets Power Re write meaningful lines while capping net retained exposure, protecting capital against severe or accumulating losses.
Retrocession extends the chain one link further: the reinsurer cedes part of its risk to retrocessionaires.
Objectives
Protect capital and solvency against tail events.
Reduce earnings volatility and increase gross capacity.
Manage accumulation across correlated risks.
Worked example
Power Re writes a \(10\text{M}\) line and retrocedes everything above a \(3\text{M}\) net retention. On an \(8\text{M}\) loss it keeps \(3\text{M}\) net and recovers \(5\text{M}\) from its retro panel.
Counterparty security
A retro program is only as strong as its panel. Power Re diversifies across financially strong retrocessionaires, sets per-counterparty limits, and uses collateral, letters of credit or trust arrangements where appropriate, a core input to rating agencies' view of balance sheet strength.
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