Retention is the amount of risk the ceding company keeps for its own account or the account of others. In this article, the author gives an idea of how the insurers need to balance their risks and fix their retentions.

It hardly need be said that an insurer must limit his liabilities in order to protect his assets, for it is these assets, namely his capital and reserves already established, which enable him to trade. This point is, of course, fundamental to carrying on the business of insurance and akin to the principle upon which insurance is based-the spreading and sharing of losses.

The fixing of the insurer's limit of retained liability is probably the most important factor in planning the development of any underwriting portfolio. This limit of liability is known as `retention', and maybe expressed either as a `monetary amount' or as `percentage share' (usually in conjunction with a monetary amount). The potential profitability of an insurance portfolio depends on underwriting skills, but the actual profit achieved will turn on the level and form of retention.

The fixing of retentions must be the primary factor in planning reinsurance protection. Therefore, although the decisions are likely to be taken by higher underwriting and corporate management, reinsurance managers must play an important role, while reinsurers and reinsurance brokers must understand the needs of the original insurer if they are to fulfill their role.