DEFINITION of 'Underlying Retention'

The net amount of risk or liability arising from an insurance policy (or policies) that is retained by a ceding company after reinsuring the balance amount of the risk or liability. The degree of underlying retention will vary depending on the ceding company's assessment of the risks involved in retaining part of the policy liability and the profitability of the insurance policy.

BREAKING DOWN 'Underlying Retention'

Since reinsurance requires the payment of a premium to the reinsurer, underlying retention enables an insurer to avoid payment of this reinsurance premium. The insurer will generally retain the most profitable policies or their lowest-risk components, while reinsuring less profitable, higher-risk policies.

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