What Does Retrocession Mean?

The term has several meanings, one of which is a practice provided by a reinsurance company to insure another similar company. This means the new reinsurer assumes a business that is originally covered by the first company who initiates the re-reinsurance process.

In its second meaning, retrocession refers to a willing act of restoring or handing back a transferred property from one party to the other. Retrocession in this case also means the reception of the property resulting from the initial request based on free-will or voluntary transactions. Obviously, forced acts and returns are excluded when talking about retrocession. A good example for this meaning is Hong Kong being given back by a retrocession act to the Chinese in 1997.

In its third meaning, retrocession means a process of joining assets together and thus diversifying them. This way they can be divided to the stakeholders who can enjoy the benefits of this process.

Retrocession Explained

In order to reduce their risks (their potential losses), reinsurance companies very often appeal to other reinsurance companies. In case a catastrophe occurs (a tornado for instance), this step would prove itself to have been absolutely necessary.