What it means
An insurer accepts premiums in return for covered risks, and it can pass some premium and associated risk to a reinsurer. What remains after that cession is the net business, although contractual arrangements and recoverability affect the true economic exposure.
The International Association of Insurance Supervisors defines a risk retention ratio as net written premium divided by gross written premium, where gross written premium includes policies issued by the insurer plus assumed reinsurance; this is an underwriting and reinsurance measure. Suppose an insurer writes or assumes $100 million in gross premium and cedes $30 million to reinsurers.
Net written premium is $70 million under this simple illustration, and the retention ratio is 70%. That number says nothing by itself about profit, and a 70% ratio need not mean 70% of customers stayed with the company.
Customer retention counts renewals or continuing relationships, whereas the reinsurance ratio compares premiums before and after cessions, and mixing the two can lead to a false story about market share. Ceding less can keep more premium, but it also leaves more claim exposure on the insurer.
A company could report higher net retention just before a concentrated catastrophe loss, so revenue without associated risk analysis is an incomplete picture. Ceding more can be sensible when one large loss could strain capital; a small carrier writing property cover in a hurricane-prone region may buy substantial catastrophe reinsurance, and a lower ratio may reflect prudent protection rather than weak sales.
The ratio can also fall for less reassuring reasons, because if reinsurers demand expensive terms, the insurer's net premium economics may worsen. The IAIS notes that a very low ratio relative to peers may call for questions about reliance on reinsurance, including arrangements used to front for others.
Trends can signal a change in risk appetite, as a sudden rise might reflect reduced reinsurance, new business mix, or a shift in assumed business, so obtain the programme notes before calling it growth or superior underwriting. A high ratio can suit an insurer with diversified risks and ample capital.
The same ratio could be dangerous for a thinly capitalised insurer concentrated in one geographic peril, so read the underlying portfolio, not just the headline. For a manager choosing reinsurance, ask how much volatility the firm can withstand, which events could create multiple claims at once, and whether counterparties can pay.
The retention ratio records a choice but cannot make that choice for management. When an article uses business net retention to discuss lost customers, check its formula, because if it subtracts cancelled policies from the starting policy count it is measuring renewal or account retention instead, and neither figure is interchangeable with net written premium divided by gross written premium.
In practice
Real-world examples.
Example
A property insurer has 120 million in gross written premium and cedes 48 million. Its net written premium is 72 million and the simplified retention ratio is 60%, before analysing claim exposure or capital.
Example
A carrier buys more catastrophe reinsurance. Net premium falls relative to gross and so does the ratio, even if the same policyholders renew their cover.
Example
A rival keeps a larger share of premium but concentrates risks in one coast. Comparing only retention ratios would hide a potentially larger aggregate loss after a severe storm.
Formula
Calculation
Risk retention ratio = net written premium / gross written premium x 100. If gross is 100 million and ceded premium is 30 million with no other adjustments, net is 70 million and the ratio is 70%. The premiums must share a reporting basis; the calculation does not measure customer renewals or profitability.Case study
Seen in the real world.
Fictional example: Farah reviewed an insurer's presentation claiming retention had climbed from 65% to 82%. She first thought more clients had renewed. The financial notes showed instead that the carrier had purchased less reinsurance while its coastal property portfolio had grown.
Farah asked for modelled catastrophe exposure and capital coverage before treating the increase as good news. Client renewal data was a separate metric. Her revised memo distinguished keeping customers from keeping insured risk and did not infer profit from either percentage alone.
Watch out
Common mistakes.
- Calling net written divided by gross written premiums a customer-renewal percentage.
- Assuming a higher ratio always signals growth or profit, regardless of concentrated claim exposure.
- Comparing insurers across different lines, periods or reporting bases without checking reinsurance and capital.
Questions
People also ask.
What does business net retention measure?
In this insurance context, it compares net written premium with gross written premium and indicates how much premium and associated risk remains after reinsurance cessions.
Does 80% mean eight in ten policyholders renewed?
No. Renewal or customer retention is a different count-based metric. An 80% net-to-gross premium ratio concerns reinsurance.
Is a higher ratio always better?
No. It keeps more premium and more exposure. Assess losses, capital, concentration and reinsurance quality before judging the level.
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