Retention

Retention is the portion of risk a business keeps instead of transferring to an insurer. In a policy, it is the amount of each loss the insured bears first. A deductible is usually paid by the insurer and billed back; a self-insured retention is paid by the insured before the insurer's obligation attaches. At the program level, retention is a strategy: higher deductibles, a large deductible program, a captive, or plain self-insurance for predictable losses, with insurance reserved for severe ones.

The trade-off is premium against volatility. Say raising a deductible from $5,000 to $25,000 saves $12,000 in premium (a hypothetical figure). A business expecting two claims a year above $25,000 would retain an extra 2 × $20,000 = $40,000, so the saving does not cover the added risk. If it expects one such claim every three years, the extra is about $6,700 a year, and the trade works. The break-even is the premium credit against expected retained losses.

Higher retention also brings work: claims handling, collateral such as a letter of credit, loss reserves and cash for the bad year. The word is used in reinsurance for the amount the cedent keeps before reinsurance pays, and in representations and warranties insurance for the buyer's first-loss share.

The deductible and retention break-even calculator runs the break-even, and the guide on risk transfer vs retention: avoid, reduce, transfer or retain sets retention within the four risk responses. See self-insured retention for the liability-policy version.