What is Retention Limit
Definition: The maximum amount of risk retained by an insurer per life is called retention. Beyond that, the insurer cedes the excess risk to a reinsurer. The point beyond which the insurer cedes the risk to the reinsurer is called retention limit.
Description: Retention limits are determined by the insurer and may vary depending on the underwriting criteria. The retention limits for different insurance products will also differ. Retention is computed on the basis of Net Amount at Risk. This metric is computed as the sum assured minus accumulated amount.
The higher the retention limit, the lower the reinsurance costs. Lower retention limit may lead to a phenomenon called fronting wherein the insurers will cede the total risk to the reinsurer which is often a captive of the primary insurer.
Description: Retention limits are determined by the insurer and may vary depending on the underwriting criteria. The retention limits for different insurance products will also differ. Retention is computed on the basis of Net Amount at Risk. This metric is computed as the sum assured minus accumulated amount.
The higher the retention limit, the lower the reinsurance costs. Lower retention limit may lead to a phenomenon called fronting wherein the insurers will cede the total risk to the reinsurer which is often a captive of the primary insurer.