New Jersey Life Producer Practice Exam

When a reinsurer obtains insurance for itself from another reinsurer, what is this process called?

1. Reinsurance acquisition

2. Retrocession

3. Duplication

4. Sub-reinsurance

The correct answer is: Retrocession

The process when a reinsurer secures insurance for itself from another reinsurer is called retrocession. In this scenario, the original reinsurer, often referred to as the "ceding reinsurer," transfers part of its risk to another reinsurer, thus further spreading the risk that it has assumed from the primary insurers. This mechanism allows reinsurers to mitigate exposure to large claims and balance their portfolios more effectively. Retrocession is an essential aspect of the reinsurance industry, as it promotes stability and financial health among reinsurers. Through this practice, they can manage risks more efficiently and ensure they remain solvent in the face of potentially significant claims. Other terms mentioned in the options represent concepts that don't accurately describe this process. For example, reinsurance acquisition typically refers to the overall process of acquiring reinsurance, while duplication implies a redundancy that does not apply in this context. Sub-reinsurance is not a commonly used term in the industry. Thus, retrocession correctly identifies the specific action of a reinsurer transferring risk to another reinsurer.