Retrocession

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  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 FAQS
  1. How can I use asset allocation to properly diversify my portfolio?

    Asset allocation is the process of dividing a portfolio among a number of different asset classes. Most commonly, asset allocation ... Read Full Answer >>
  2. What is the difference between payment netting and close-out netting?

    Both payment netting and close-out netting are methods of settlement between two or more parties, used to reduce risk exposure. ... Read Full Answer >>
  3. How have portfolios from within the efficient frontier performed historically?

    By definition, portfolios within the efficient frontier have historically performed well. Determining which portfolios operate ... Read Full Answer >>
  4. What is the minimum capital adequacy ratio that must be attained under Basel III?

    Under Basel III, the minimum capital adequacy ratio that banks must maintain is 8%. The capital adequacy ratio measures a ... Read Full Answer >>
  5. How is portfolio variance reduced in Modern Portfolio Theory?

    According to modern portfolio theory, or MPT, portfolio variance can be reduced by diversifying a portfolio through the inclusion ... Read Full Answer >>
  6. What are some examples of smart beta ETFs that use passive and active management?

    There are a number of smart beta exchange-traded funds (ETFs) that use passive and active management, including the WisdomTree ... Read Full Answer >>
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. Professionals

    When Couples Have Different Risk Appetites

    Communication, compromise and frequent monitoring will lead to successful investing for spouses with different risk tolerances.
  4. Entrepreneurship

    Fed Raising Rates Affects Startup Funding

    With interest rates having nowhere else to go but up, the Fed’s impending interest rate raise will likely begin to reverse the flow of startup funding.
  5. Entrepreneurship

    MLPs: Is Now the Right Time to Invest?

    Here's what you need to know about MLPs, those under-the-radar investment vehicles.
  6. Professionals

    Indexing vs. Stock Picking: Which is Better Now?

    Indexing and stock picking both have positive and negative features. One has outperformed the other historically, but which is the better option right now?
  7. Credit & Loans

    What is a Syndicated Loan?

    A syndicated loan is one that involves a group of lenders (called the syndicate) who pool their lending resources to make a loan.
  8. Investing Basics

    Explaining the Volcker Rule

    The Volcker Rule prevents commercial banks from engaging in high-risk, speculative trading for their own accounts.
  9. Investing

    Two Heads Are Better Than One In Finances

    Given the importance of a retirement account, having professional help with savings accounts is far more important than a personal chef or chauffer.
  10. Investing Basics

    What is an Asset-Backed Security?

    An asset-backed security (ABS) is a debt security collateralized by a pool of assets.

You May Also Like

Hot Definitions
  1. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  2. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  3. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  4. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  5. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  6. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
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!