Retention rate (renewal ratio)
The share of expiring contracts an insurer renews, an indicator of a portfolio's stability and quality, whose sudden decline signals a pricing, service or selection problem.
The retention rate measures the share of expiring contracts that are renewed, by number or premium. It reflects two distinct decisions that must be separated to interpret it: the insured's, which stays or leaves for a competitor, and the underwriter's, which renews, amends or non-renews. A portfolio with a high, stable rate costs less to maintain, since acquiring new business takes brokerage and underwriting work, and it is better known, since each year adds history on each risk. Renewed business also has, on average, lower losses than new business, because one knows better what one keeps. A sudden drop in the rate signals a problem: a price no longer competitive, deteriorating claims service, loss of a broker, or a deliberate decision to clean up the portfolio. In the latter case the drop is intended, and it is read together with the losses on non-renewed business. For the underwriter, the retention rate, the hit ratio and rate change together form the dashboard of the cycle.
Textbook case: a portfolio of 1,000 professional liability policies renews 870, a rate of 87 percent. Of the 130 departures, 90 are non-renewals decided by the insurer on loss-making risks, and 40 are customers leaving for competitors: the apparent decline masks a deliberate selection.
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