In reinsurance, what does the term "cession" refer to?

Cession refers to the process of transferring risk from an insurer to a reinsurer. This is a fundamental concept in reinsurance as it allows the primary insurer to mitigate risk exposure by sharing it with another insurance company. When an insurer cedes a portion of its risk to a reinsurer, it can protect itself from significant losses, ensure greater financial stability, and enhance its capacity to underwrite more policies.

In practice, cession creates a contractual relationship where the reinsurer agrees to assume the risk that the insurer passes on. This transfer can be a full or partial cession, depending on how much risk the insurance company chooses to share.

The other options, while related to reinsurance, do not accurately define cession. The cost of reinsurance relates to the financial aspects of obtaining reinsurance coverage rather than the act of transferring risk. The amount of claim paid by the reinsurer pertains to the financial settlements made under the reinsurance agreement and does not define the process itself. Legal documentation is also important in reinsurance but does not encompass the concept of cession.