DEFINITION of '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.

  1. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  2. Catastrophe Excess Reinsurance

    Insurance for catastrophe insurers. Because of the unpredictable ...
  3. Private Investment Fund

    A type of financial investment company which meets either of ...
  4. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning ...
  5. Reinsurance

    The practice of insurers transferring portions of risk portfolios ...
  6. Finite Reinsurance

    A type of reinsurance that transfers over only a finite or limited ...
Related Articles
  1. Options & Futures

    Getting the Whole Story on Variable Annuities

    Variable annuities are another way to save money tax-deferred - but don't jump in blindly!
  2. Home & Auto

    When Things Go Awry, Insurers Get Reinsured

    Guru Warren Buffett is making this sector popular. Learn more here.
  3. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  4. Stock Analysis

    6 Hedge Funds With High Dividends

    Understand what value hedge funds can provide investors in the financial sector. Learn about seven hedge funds that pay consistent and high dividends.
  5. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  6. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  7. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  8. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  9. Bonds & Fixed Income

    High Yield Bond Investing 101

    Taking on high-yield bond investments requires a thorough investigation. Here are looking the fundamentals.
  10. Mutual Funds & ETFs

    Top 3 Commodities Mutual Funds

    Get information about some of the most popular and best-performing mutual funds that are focused on commodity-related investments.
  1. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  2. Who do hedge funds lend money to?

    Many traditional lenders and banks are failing to provide loans. In their absence, hedge funds have begun to fill the gap. ... Read Full Answer >>
  3. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
  4. What do hedge fund analysts do?

    A hedge fund analyst primarily provides support to a portfolio manager on how to best structure the hedge fund's investment ... Read Full Answer >>
  5. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  6. When are mutual funds considered a bad investment?

    Mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  2. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  3. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  4. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  5. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  6. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!