Retrocession spiral
A single risk retroceded in a loop within a closed circle of reinsurers, where it concentrates instead of thinning out.
July 6, 1988: the Piper Alpha platform explodes in the North Sea, killing 167; the loss then circles for years through the Lloyd's LMX market, from one syndicate to the next. In a retrocession spiral, a risk ceded several times within a small group of reinsurers comes back to hit its original carrier, and more than once. Each one believes it has passed on part of its exposure. It has kept it, by a roundabout route. In a closed circle, retro moves the risk around without spreading it, and risk that moves around piles up at the nodes of the circle. The London market paid for this at the turn of the nineties. The worst consequence is about information: once the retrocessions are unwound, nobody has a consolidated view of who really carries what.
A risk retroceded in a closed circle is recycled rather than transferred, as the Lloyd's LMX spiral showed after Piper Alpha in July 1988. It should therefore not relieve capital requirements the way a genuine cession to a third party outside the circle would.
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