RETROCESSION

The term has got three different meanings in which it is used—

(i) The purchase of ‘reinsurance’ by a ‘reinsurance company’ (as in the case of India, the GIC going for ‘reinsurance’ on the ‘reinsurance’ it has provided to other ‘insurance companies’ operating in India). This limits the risk that a reinsurance company may face, since it has purchased insurance against an ‘event’ that might affect a company that it had underwritten (reinsured). If a reinsurance company continues to purchase insurance it might ‘unknowingly’ buy back its own risk, which is known as ‘spiraling’.

(ii) The ‘voluntary’ act of returning ceded property by one to another which may be a result of ‘request’ to have property returned. But, by definition, it is not the result of a ‘forced’ transaction. Returning of Hong Kong to China by the UK in 1997 is the best such example of the recent times.

(iii) The act of ‘differentiating’ and ‘diversifying’ assets by consolidating and then dividing them amongst a number of stakeholders – by doing so the risk involved is ‘retroceded’ (i.e., cut down or minimised). This is, usually, done by the ‘hedge funds’ in their day-to-day portfolio management.