insurance

Retention (Insurance)

The amount of risk or loss that an insured party keeps and pays for themselves before insurance coverage begins. This is similar to a deductible but often applies to commercial insurance or reinsurance arrangements.

Example

“The corporation chose a $100,000 retention level, meaning they would pay the first $100,000 of any claim before their excess insurance coverage kicked in.”

Memory Tip

RETAIN = REMAIN with you - this is the risk that remains with you before insurance pays.

Why It Matters

Higher retention levels typically result in lower insurance premiums, allowing businesses to manage costs while maintaining protection against catastrophic losses. Understanding retention helps businesses balance risk management with cost control in their insurance programs.

Common Misconception

Many people use retention and deductible interchangeably, but retention often involves more sophisticated risk management strategies and may apply per year rather than per claim. Retention can also involve the insured handling claims management for amounts within the retention level.

In Practice

A manufacturing company sets a $250,000 annual retention for their product liability insurance. During the year, they face three claims: $75,000, $150,000, and $400,000. They pay the first two claims entirely ($225,000 total) and $25,000 of the third claim to reach their $250,000 retention. The insurance company then pays the remaining $375,000 of the third claim and any additional claims for that year.

Etymology

From Latin 'retinere' meaning 'to hold back' or 'keep,' referring to the portion of risk the insured holds back rather than transferring to the insurer.

Common Misspellings

retentoinretention insurenceretentonretetion

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