Retention
The share of a risk that a cedant or insured keeps for its own account before any cession, the central trade-off between the cost of protection and capital tied up.
The retention designates the share of a risk that a cedant, or an insured, chooses to keep for its own account before transferring the surplus to a reinsurer or insurer. In non-proportional reinsurance, it corresponds to the priority, the threshold below which the cedant bears losses alone. The level of retention is one of the most structuring strategic decisions of a risk-transfer policy, because it arbitrates between two opposing requirements. A high retention reduces the cost of the protection purchased, but exposes the balance sheet more and ties up more capital to absorb the shocks retained. A low retention offers more complete protection, at the cost of a heavier cession premium and a thinner margin. Retention also plays a role in aligning interests, the fact that the cedant keeps a share of the risk, summed up by the expression skin in the game, reassuring the reinsurer about the quality of underwriting and mitigating moral hazard. In cyber, calibrating retention remains delicate, because uncertainty over the severity of events makes it hard to estimate the capital needed to carry the retained share.
Textbook case: a regional insurer chooses a high retention on its cyber portfolio to limit the cost of its reinsurance. A systemic attack then forces it to absorb a considerable burden against its own funds, revealing the downside of a poorly calibrated retention.
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