Retention limit
A retention limit is the amount of loss a ceding insurer keeps for its own account before its reinsurance responds. It is also called the retention or net line.
In a reinsurance program, the cedent decides how much of each loss it is willing to absorb itself, and that amount is the retention limit. As the Insurance Information Institute explains, under excess of loss reinsurance the primary company retains a certain amount of liability, known as the ceding company's retention, and the reinsurer covers losses above that amount up to a set limit.
Setting the retention is a balancing act. A higher retention means the insurer keeps more premium but also more risk, while a lower retention transfers more risk to reinsurers at a higher cost. The right level depends on the insurer's capital, risk appetite, and the volatility of the book.
For example, an insurer might retain the first 1,000,000 dollars of any single loss and reinsure the layer above it. Reinsurers such as RiskCube Re respond above the cedent's retention, providing capacity for the larger or more complex losses a carrier or MGA chooses not to keep.
Definitions are educational and general, and specific contracts, endorsements, and state rules may modify them. For regulatory guidance, refer to the NAIC or the Insurance Information Institute.