Retrocession

What is 'Retrocession'

1. The practice of one reinsurance company essentially insuring another reinsurance company by accepting business that the other company had agreed to underwrite.

2. The voluntary act of returning ceded property from one group to another. Retrocession can also be the result of a request to have property returned but, by definition, is not the result of a forced transaction.

3. The process of differentiating or diversifying assets by consolidating and then subdividing them amongst a number of stakeholders.

BREAKING DOWN 'Retrocession'

1. When one reinsurance company has other reinsurance companies partially underwrite some of its reinsurance risk, it essentially diversifies its risk portfolio and limits its potential losses as a result of a catastrophe. For example, if a hurricane causes widespread damage to businesses, homes, automobiles and lives, a single insurer could face bankruptcy without retrocession.

2. The best known international act of retrocession is when Hong Kong was given back to the Chinese from the British in 1997.

3. Hedge funds often buy very valuable single assets and divide them on a pro-rata basis amongst partnership unitholders. Just as risk and liabilities can be retroceded, so can assets.

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