Retention (Insurance)
The portion of risk that an insurer keeps for its own account rather than transferring to reinsurers. It represents the maximum amount an insurer will pay on any single claim or aggregate of claims before reinsurance coverage begins.
Example
“The insurance company set its retention at $5 million per catastrophic event, meaning it would handle all claims up to that amount before its reinsurance coverage would activate.”
Memory Tip
Think 'retain' - the insurer retains (keeps) this portion of the risk instead of passing it along to someone else.
Why It Matters
Retention levels directly affect insurance companies' profitability and risk exposure, which ultimately impacts premium pricing and policy availability for consumers. Higher retentions can mean lower reinsurance costs but greater risk, while lower retentions provide more protection but cost more.
Common Misconception
Many people confuse retention with deductibles, thinking they're the same thing. While both involve keeping some risk, retention refers to what the insurance company keeps, while a deductible is what the policyholder pays before coverage begins.
In Practice
ABC Insurance Company writes homeowner policies in hurricane-prone areas with a $10 million retention per storm event. When Hurricane Emma causes $25 million in claims, ABC pays the first $10 million from its own reserves, then its reinsurer covers the remaining $15 million. If the storm had only caused $8 million in damage, ABC would have paid the entire amount since it was below their retention threshold.
Etymology
From Latin 'retinere' meaning to hold back or keep, referring to the risk that insurers hold rather than pass on to others.
Common Misspellings
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Related Terms
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See Also
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