What does retention mean in the insurance industry?

In the insurance industry, retention refers to the amount of risk that an insurer maintains or retains before transferring the remaining risk to another party, often through reinsurance. This means that an insurer decides how much risk it is willing to carry on its own balance sheet versus how much it chooses to pass on to a reinsurer.

The concept of retention helps insurers manage their exposure to risk while maintaining the ability to underwrite policies in a profitable manner. Retention is typically considered in terms of the total dollar amount, which aligns with the idea of how much risk the insurer is willing to hold before seeking external risk-sharing solutions.

In contrast, the option that states the maximum amount that the insurer can insure does not define retention accurately. The maximum amount relates more to the policy limits or underwriting guidelines rather than the concept of risk retention. Therefore, the correct understanding of retention focuses on the balance of risk held by the insurer and the associated management strategy.