Retrocession

“Retrocession” is one of those fun words that has multiple meanings. It’s kind of like “jam.” Are we in trouble, are we making rad music with our broskis, or are we spreading something on toast? The meaning of the word depends on the context in which we use it. When it comes to “retrocession,” there are really three different definitions. We’ll take a brief journey through each, and then we’ll all be much better able to decide which one best fits whatever conversation we’re having.

If we’re talking with our financial friends, chances are we’re not talking about the “retrocession” that is the opposite of “secession.” In this scenario, “retrocession” is when land is given back to the government or other entity from which it was taken. In 1997, the UK gave Hong Kong back to China; this is an example of retrocession.

In the insurance world, “retrocession” happens when one reinsurance company sells some of their risk to another one. This is done to protect the first company in case of catastrophe. For example, if some ginormous hurricane causes insane amounts of damage to a bunch of the first company’s clients, they may not have enough funds on hand to cover all of the expenses they need to cover. By retroceding some of their risk to another company, they make it less likely that they’ll run out of money as a result of one huge insurance event.

And finally, let’s get back to our financial friends. If they use the term “retrocession,” they’re probably referring to the controversial fees and kickbacks that tend to get passed around between financial asset managers and their advisors and distributors. Why controversial? Because if Sandy gets paid a hefty commission to push a certain product, then is she really acting in the best interest of her investors, or is she just trying to score that commission? It can be really hard to tell sometimes, which is why this type of retrocession tends to get some big frowny-faces from folks who advocate things like impartiality and transparency in financial transactions and interactions.