What is 'Retrocession' in reinsurance?

Retrocession refers to the practice in the reinsurance industry where a reinsurer cedes a portion of its risk to another reinsurer. This transaction allows the original reinsurer to manage its risk exposure more effectively by sharing it with another entity, enhancing its capacity to underwrite additional risks.

This process is important in the reinsurance market as it provides the reinsurer with additional financial backing and helps it stabilize its portfolio. By passing on some of the risks to another reinsurer, the original reinsurer can achieve better capital efficiency, mitigate risks, and ensure it has adequate resources to cover claims.

The other options do not accurately describe retrocession. For example, issuing a new policy relates to primary insurance operations rather than reinsurance dynamics. The adjustment of loss claims pertains to claims handling processes, while client retention methods focus on customer loyalty and service strategies in primary insurance marketing, which does not involve the mechanism of retrocession.