Retention
The amount of risk or loss that the cedent keeps for its own account rather than transferring to a reinsurer.
What It Is
Retention is the amount of risk or loss that the primary insurance carrier (cedent) retains for its own account after ceding portions to reinsurers. In proportional reinsurance, retention is expressed as a percentage of each risk. In non-proportional (excess of loss) reinsurance, retention is expressed as a dollar amount that the cedent must absorb before the reinsurance coverage attaches.
Retention levels reflect the carrier's risk appetite, financial strength, and confidence in its underwriting. A large, well-capitalized carrier might retain $5M per risk on commercial property, while a smaller carrier might retain only $500,000. Higher retentions mean the carrier keeps more premium but also absorbs more loss. Lower retentions reduce the carrier's loss volatility but also reduce its premium retention.
Carriers adjust retention levels based on their surplus position, loss experience, and strategic goals. A carrier growing rapidly might lower retentions to conserve surplus for new business. A carrier with strong underwriting results might raise retentions to retain more profitable premium. Retention decisions are among the most important strategic choices a carrier makes, directly affecting profitability, volatility, and capacity.
Why It Matters for Brokers
Carrier retention levels affect brokers through their impact on capacity and pricing. A carrier with a $2M per-risk retention on property needs reinsurance for any risk above $2M, which adds cost and time to the placement. Understanding carrier retention levels helps brokers match accounts to carriers that can handle the risk within their net retention, typically resulting in faster quotes and more competitive pricing.
Real-World Example
A broker has a $4M property risk. Carrier A has a $5M per-risk retention and can write the account entirely within its net capacity, quoting $18,000. Carrier B has a $1.5M retention and needs facultative reinsurance for the $2.5M excess, quoting $23,000 reflecting the facultative cost. The broker places with Carrier A, saving the client $5,000 and avoiding the three-week delay for facultative placement.
Common Mistakes
- 1Not matching account size to carrier retention levels, leading to unnecessary facultative reinsurance costs and delays.
- 2Assuming all carriers have the same capacity when retention levels vary enormously between large national carriers and smaller regional or specialty carriers.
How brokerageaudit.com Handles This
brokerageaudit.com maintains estimated per-risk retention data for major carriers by line of business, enabling brokers to pre-screen carrier matches based on account size. The system flags submissions that exceed a carrier's estimated retention, suggesting the broker plan for additional placement time.