Casualty Actuarial Society (CAS) Practice Exam

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What is a retrocession in reinsurance?

  1. A situation where an insurer denies coverage

  2. A process where a reinsurer transfers risk to another reinsurer

  3. A type of insurance policy for retroactive events

  4. A full insurance policy cancellation

The correct answer is: A process where a reinsurer transfers risk to another reinsurer

A retrocession in reinsurance refers specifically to the process where a reinsurer transfers risk to another reinsurer. This is a common practice within the reinsurance industry to manage risk exposure and ensure that a reinsurer does not become overexposed to any one set of risks or events. In essence, when a reinsurer takes on risk from an original insurer, they may choose to further mitigate their own risk by passing some portion of that risk onto another reinsurer. This process not only helps to spread the risk within the reinsurance market but also allows reinsurers to balance their own portfolios and maintain financial stability. Understanding retrocession is crucial for actuaries and insurance professionals, as it highlights the layered structure of the insurance and reinsurance markets and the strategies employed to manage risk effectively.

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