Amount of risk or loss the ceding insurer keeps before reinsurance responds.
In reinsurance, retention is the amount of risk or loss that the ceding insurer keeps for its own account before the reinsurance structure responds above that level.
Retention is one of the most important economic choices in a reinsurance program because it shows how much volatility and severity the insurer is prepared to absorb net. A lower retention buys more protection but usually costs more. A higher retention leaves more exposure with the insurer.
That is why retention sits at the center of pricing, capital management, catastrophe planning, and line-size decisions.
In Canadian reinsurance practice, retention can matter in more than one way:
Retention is therefore not just a technical number in a treaty. It is a statement about the insurer’s own appetite, capital strength, and willingness to absorb loss before risk transfer support begins.
| Reinsurance question | Why retention matters |
|---|---|
| How much loss does the insurer keep net? | Retention is the insurer’s first layer of financial responsibility. |
| When does an excess layer attach? | Attachment is measured above the kept retention. |
| How much volatility is the insurer accepting? | Higher retention leaves more earnings and capital strain with the insurer. |
| How much reinsurance premium is the insurer willing to spend? | Lower retention usually buys more protection but at higher cost. |
An insurer keeps the first CAD 5 million of catastrophe loss from an event and buys protection above that amount. The CAD 5 million net layer is the insurer’s retention. Only losses above that layer are recoverable under the reinsurance contract, up to the agreed limit.
The same logic can operate in individual-risk structures. If the insurer wants to write a large commercial property but keep only a defined portion net, its retention helps determine how much treaty or facultative support it still needs above that line.
One common mistake is treating retention as if it were the same thing as a policyholder deductible. It is not. A deductible applies inside the customer’s policy. Retention applies at the insurer-reinsurer level.
Another mistake is assuming higher retention is always better because it saves reinsurance premium. It may save cost, but it also leaves the insurer more exposed to large losses and earnings volatility.
Readers also sometimes think retention is chosen once and then left alone. In practice, insurers review retention strategy as market pricing, catastrophe exposure, capital conditions, and growth plans change.
Retention can be defined differently across treaty types, facultative placements, and layer structures. The broad idea is consistent, but the exact operational meaning depends on the contract design.