FoundationsCore

Retention & Cession

Q: A cedent raises its per-risk retention from $5M to $8M. All else equal, what happens?

Ceded premium falls and net volatility rises — Keeping more means ceding less premium — and keeping more of every loss, so the net result swings harder.

Q: On a $20M sum insured with a $4M retention under a proportional treaty, a $10M loss occurs. What does the cedent retain?

$2M — The retention is 4 ÷ 20 = 20% of the risk, so the cedent keeps 20% of the loss: $2M. It does not keep the first $4M — that is excess-of-loss thinking.

Net line vs ceded share

How much the insurer keeps for its own account, and how much it passes on.

Open the interactive version → definition, quiz, structure diagram and progress tracking

Definition

Retention (also net line, priority or deductible depending on the cover) is the amount of risk the cedent keeps for its own account. Cession is the amount transferred. Retention can be set per risk (a $5M line on any one building), per event (a $20M catastrophe priority), or in the aggregate over a year.

Retention is a capital decision, not an underwriting one: set it against surplus, earnings volatility tolerance and rating-agency capital models.
The same book usually carries several retentions at once — per risk, per event and aggregate.
Too low a retention gives away profit; too high a retention gives away sleep.

Cession % = Ceded amount ÷ Total sum insured

On proportional business, this single percentage then applies to premium and to every loss.

Worked example

A cedent with a $5M per-risk line writes a $30M sum insured. It retains $5M (16.7%) and cedes $25M (83.3%). Every dollar of premium and every dollar of loss on that risk splits in the same ratio.

Scenario · figures in USD

One retention, three risks

Northbridge sets a net line of $5M per risk and supports it with proportional capacity above that. Watch what the fixed retention does to the cession percentage as the sum insured moves.

Risk A — sum insured $5M	Retain 100% · cede 0%
Risk B — sum insured $12M	Retain 41.7% · cede 58.3%
Risk C — sum insured $30M	Retain 16.7% · cede 83.3%
Maximum net exposure on any one risk	$5M
Total sums insured across the three	$47M
Total retained	$15M

So whatA fixed monetary retention automatically cedes more of the big risks and less of the small ones. That is exactly what homogenises the net account.

Check your understanding

A cedent raises its per-risk retention from $5M to $8M. All else equal, what happens?

Ceded premium falls and net volatility rises. Keeping more means ceding less premium — and keeping more of every loss, so the net result swings harder.

On a $20M sum insured with a $4M retention under a proportional treaty, a $10M loss occurs. What does the cedent retain?

$2M. The retention is 4 ÷ 20 = 20% of the risk, so the cedent keeps 20% of the loss: $2M. It does not keep the first $4M — that is excess-of-loss thinking.

Word problem

Ashworth Marine writes a hull risk with a sum insured of $18M and a premium of $90,000. Its net line is $4M and the balance is ceded proportionally. A partial loss of $9M occurs. Split the sum insured, the premium and the loss.

Show a hint

Find the retention percentage first, then apply the same percentage to everything else.

Reveal the worked answer

Retention % = $4M ÷ $18M = 22.22%; cession % = 77.78%
Ceded sum insured = $18M − $4M = $14M
Ceded premium = 77.78% × $90,000 = $70,000; retained premium = $20,000
Reinsurer's share of the loss = 77.78% × $9M = $7.0M
Cedent's share of the loss = 22.22% × $9M = $2.0M

Cedent: $4M line, $20,000 premium, $2.0M of the loss. Reinsurers: $14M, $70,000 premium, $7.0M of the loss. Note that the cedent pays $2.0M on a $9M loss even though its line is $4M — proportionality applies to partial losses too.