What is a Cession in the context of reinsurance?

In the context of reinsurance, a cession specifically refers to the unit or portion of insurance that is transferred from the primary insurer (often called the ceding company) to the reinsurer. This transfer occurs to manage risk more effectively, allowing the ceding company to mitigate its exposure to large losses by sharing some of the risk with the reinsurer.

When an insurance company decides to reinsure a portion of its policies, the specific risks associated with those policies are what constitute the cession. It is important to understand that this concept is distinct from the total risk being transferred or any financial aspects related to reinsurance premiums. Recognizing cession helps clarify how insurance companies can operate more safely and efficiently in the insurance market by distributing risk among various parties.