Definition
Retention
Retention is the portion of a risk an insurer keeps on its own books rather than ceding to reinsurers.
Setting the retention level is a key risk-management decision: a higher retention keeps more premium but exposes the insurer to larger losses, while a lower retention cedes more premium but caps volatility. Retention is calibrated against the insurer's capital and risk appetite.
In reinsurance terms, the retention is what the insurer bears before the reinsurer's cover begins. The same idea applies at the policyholder level, where a deductible is the retained portion of a loss. Prudent retention setting balances profitability against solvency protection.
Related terms
- DeductibleA deductible is the amount you must pay yourself before your insurance starts covering a claim.
- ReinsuranceReinsurance is insurance for insurers, where a reinsurer assumes part of the risk an insurer has underwritten in exchange for a share of the premium.
- Solvency MarginThe solvency margin is the surplus of an insurer's assets over its liabilities that regulators require it to hold to ensure it can meet claims.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.