Alberta General Insurance Level 1 Practice Exam

What is retrocession in the insurance industry?

1. A method for calculating premiums

2. Claim recovery procedures

3. Ceding a portion of risk to another insurer

4. A type of policy available to consumers

The correct answer is: Ceding a portion of risk to another insurer

Retrocession refers specifically to the practice of ceding a portion of risk from one reinsurer to another reinsurer. In the insurance industry, this is a key mechanism that enables primary insurers to manage their risks by distributing them among multiple entities. By doing so, insurers can reduce their exposure to large losses, thereby promoting stability within the industry. When a reinsurer takes on risks from a primary insurer, they may choose to further limit their exposure by transferring some of that risk to another reinsurer. This practice not only helps spread risk across multiple organizations but also allows for better capital management and the potential for more competitive pricing in the reinsurance market. The other options do not accurately capture the meaning of retrocession. Methods for calculating premiums and claim recovery procedures focus on different aspects of insurance operations, while a type of policy available to consumers does not pertain to the risk transfer underlining the concept of retrocession.