What does 'Cession' refer to in the context of reinsurance?

In the context of reinsurance, 'Cession' specifically refers to the amount of risk that an insurer transfers or cedes to a reinsurer. This process allows the primary insurance company to mitigate its risk exposure by sharing some of its potential losses with another institution. When an insurer cedes risk, it is effectively spreading its liabilities and enhancing its financial stability, which can ultimately lead to better capital management and risk assessment.

The correct understanding of cession highlights its role in the reinsurance arrangement, where an insurer takes out a reinsurance policy as a means to transfer excessive risk that could pose a threat to its solvency. It's an essential part of reinsurance contracts, defining the framework of how much risk is shared between the insurer and reinsurer.

Other concepts such as policy terms for new clients, the total amount of reinsurance purchased, or claims processed values may pertain to broader insurance principles but do not convey the specific meaning of cession in the realm of risk transfer within reinsurance. Thus, understanding cession as the amount of risk ceded is crucial for professionals navigating the complexities of reinsurance agreements.