Risk Management in Banking and Insurance · Structure and Type of Re-insurance

Parties and Structure of Reinsurance Arrangements

Updated 11 October 2026 · Fact-checked

Reinsurance is insurance for insurers. The cedant passes part of its risk to a reinsurer, keeping a retention. The reinsurer may pass part on to a retrocessionaire. A broker may arrange the deal. To solve questions, identify each party, split the risk by retention and cession, then compute each share.

Understand Parties and Structure of Reinsurance Arrangements

Every insurer faces losses it cannot carry alone. Reinsurance lets it share them. The insurer that buys cover is the cedant (or ceding company). It cedes part of the risk and part of the premium. The insurer that accepts the risk is the reinsurer.

The reinsurer can also lay off risk. When it buys reinsurance for itself, this is retrocession. The reinsurer then acts as the retrocedant, and the party accepting the risk is the retrocessionaire. This forms a chain: policyholder, cedant, reinsurer, retrocessionaire. The policyholder has a contract only with the original insurer. The reinsurance contract is separate, so the cedant stays fully liable to the policyholder.

The retention is the part of each risk the cedant keeps for its own account. It depends on the cedant's capital, its premium volume, the type of business and its appetite for volatility. The amount ceded is the part above, or outside, the retention. A reinsurance programme is the full set of arrangements. It may include proportional treaties, excess of loss layers and facultative placements, built so that a large loss falls on the right layer.

A reinsurance broker is an intermediary. It advises the cedant, designs the programme, approaches reinsurers, negotiates terms and helps with claims and accounts. The broker does not carry the risk. Cedants can also deal directly with reinsurers.

Capital structure matters too, because a cedant relies on reinsurance only if it is itself sound. Under Section 6A of the Insurance Act, 1938, a public company limited by shares carrying on life, general, health or re-insurance business must have equity shares each with a single face value, with voting rights restricted to equity shares, and the same paid-up amount on all shares (except for a period of up to one year allowed for payment of calls). Section 6B lets an officer appointed by the Authority examine a scheme proposed by the directors to bring the capital structure into line with Section 6A. Note that this covers re-insurance business too.

Key rules to remember

Retention and cession on a risk: Sum insured = Retention + Amount ceded; Amount ceded = Sum insured − Retention, when the risk is above the retention.
Quota share cession: Ceded amount = Cession % × Amount (premium or loss); Cedant keeps (100% − cession %). Applies equally to premium and claims.
Section 6A voting rights: Voting right ∝ paid-up amount of equity shares held; Voting is strictly proportionate to the paid-up amount of equity shares.
Section 6B appeal period: Appeal within 90 days of the order sanctioning the scheme; Appeal goes to the Securities Appellate Tribunal with jurisdiction over the insurer's registered office.
Transfer approval limits (Section 6A(4)): Prior approval if transferee holding > 5% of paid-up capital, or shares transferred > 1% of paid-up equity capital; The 1% test applies to an individual, firm, group or body corporate under the same management, jointly or severally.

How to solve Parties and Structure of Reinsurance Arrangements questions

Use this method for any question on parties, structure or Section 6B.

1Name each party in the chain: policyholder, cedant, reinsurer, retrocessionaire, and any broker.
2Mark who is ceding and who is accepting at each link. A reinsurer that passes risk on is a retrocedant.
3Fix the retention. Compute ceded and retained amounts for premium and for loss.
4Apply the structure given: quota share, surplus, excess of loss or facultative. Compute each layer separately.
5State that the cedant remains liable to the policyholder, and that the broker carries no risk.
6For capital structure questions, check Section 6A conditions first, then explain the Section 6B scheme steps and appeal.
7Finish with a short conclusion or recommendation on the programme.

Quickest way: Chain-and-split shortcut

When to use it: For MCQs and short numerical questions on parties and retention.

Draw the chain in one line: Policyholder → Cedant → Reinsurer → Retrocessionaire.
Write the retention first, then ceded = total − retention.
Apply percentages to premium and claims in the same way.
For Section 6B, recall the sequence: scheme placed before shareholders, officer examines, objections invited, scheme sanctioned, appeal within 90 days.

Common mistakes in Parties and Structure of Reinsurance Arrangements

Calling the reinsurer's own reinsurer a 'second reinsurer' or confusing it with the cedant.
The terms cedant, reinsurer and retrocessionaire sound alike.
Fix: The cedant is the original insurer. The retrocessionaire accepts risk from a reinsurer.
Saying the policyholder can claim directly from the reinsurer.
Students assume risk transfer passes all rights on.
Fix: The reinsurance contract is separate. The cedant stays liable to the policyholder.
Treating the broker as a risk bearer.
Brokers are involved in the risk placement, so they seem to share it.
Fix: A broker is an intermediary who arranges and advises. It does not accept risk.
Cutting retention only from premium and forgetting claims.
Students compute the premium split and stop.
Fix: Apply the same share to loss unless the treaty is non-proportional.
Thinking Section 6B applies only to life insurers.
Older wording referred to life insurance business.
Fix: The current text covers life, general, health insurance and re-insurance business.
Giving the wrong forum or period for appeal under Section 6B.
The original forum was the High Court and students recall old notes.
Fix: Appeal lies within ninety days to the Securities Appellate Tribunal within whose jurisdiction the registered office lies.

Worked examples

Example 1

Star Mutual Insurance Ltd writes a fire risk with a sum insured of ₹10,00,00,000. Its retention is ₹2,00,00,000 and the balance is ceded under a surplus treaty. Premium on the risk is ₹5,00,000. Find the ceded sum insured, the share retained and the premium ceded, assuming premium is shared in proportion to the sums insured.

Show the solution

Ceded sum insured = ₹10,00,00,000 − ₹2,00,00,000 = ₹8,00,00,000.
Retained share = ₹2,00,00,000 ÷ ₹10,00,00,000 = 20%.
Ceded share = 80%.
Premium ceded = 80% × ₹5,00,000 = ₹4,00,000.
Premium retained = ₹5,00,000 − ₹4,00,000 = ₹1,00,000.

Answer: Ceded sum insured is ₹8,00,00,000 (80%). Premium ceded is ₹4,00,000 and premium retained is ₹1,00,000.

Example 2

A public company limited by shares plans to carry on re-insurance business. Its preference shares carry votes, and it wants to restructure. Explain the Section 6A position and how Section 6B helps, including the appeal route.

Show the solution

Section 6A requires equity shares of a single face value and other capital as the regulations specify.
Voting rights must be restricted to equity shares, and the paid-up amount must be the same for all shares, except for up to one year allowed for payment of calls.
Voting carrying preference shares breaches the voting condition, so the structure is non-compliant.
Under Section 6B, an officer appointed by the Authority may examine a scheme proposed by the directors to bring the capital structure into conformity.
The scheme must first be placed before a shareholders' meeting with their opinion forwarded to the officer, and must not reduce shareholders' liability on unpaid-up capital.
The officer invites objections and suggestions and may sanction the scheme with modifications.
An aggrieved person may appeal to the Securities Appellate Tribunal within ninety days of the sanction order. The decision of the Tribunal, or of the officer if there is no appeal, is final and binding.

Answer: The company must restrict voting to equity shares and meet Section 6A. It can use a Section 6B scheme, sanctioned by the Authority's officer, with appeal to the Securities Appellate Tribunal within 90 days.

Exam tips

Case-based MCQs often test who is the cedant, reinsurer or retrocessionaire. Trace the direction of cession before answering.
In numerical questions, show retention, ceded amount and percentages as separate lines. This secures method marks.
For Section 6B, learn the sequence and the 90-day appeal. These are common one-line facts.
Remember that Section 6A applies to re-insurance business as well as life, general and health.
In a descriptive answer, add a line on the broker's role and the cedant's continuing liability.

Practice questions from Structure and Type of Re-insurance

Parties and Structure of Reinsurance Arrangements: frequently asked questions

What is the difference between a cedant and a reinsurer?

The cedant is the original insurer that passes part of its risk on. The reinsurer accepts that risk for a share of the premium.

What is retrocession?

It is reinsurance of a reinsurer's own risk. The reinsurer cedes part of its book to a retrocessionaire, which is another reinsurer.

What is a retention limit?

It is the amount of each risk, or of a portfolio, that the cedant keeps for its own account. It is set by capital strength and risk appetite.

What does Section 6B of the Insurance Act, 1938 deal with?

It provides a way to bring a company's capital structure into line with Section 6A. An officer appointed by the Authority examines the directors' scheme, invites objections and can sanction it, with appeal to the Securities Appellate Tribunal within ninety days.