Insurance Retention Limit Explained … in two paragraphs

You can call this an elevator pitch on insurance retention limit. Less can be more in certain cases.

Simply put, retention limit, in insurance, is the maximum amount of a business (or risk) that an insurance company retains in its books. It calls on other insurance companies (or reinsurers) to help assume responsibility for the excess above this limit. In other words, the company insures itself for the amount above its retention limit.

For instance, if an insurance company’s retention limit is N10 million and you have insured your asset for N30 million, the company will issue you a policy for the entire N30 million, retain N10 million in its books, and seek cover for the balance of N20 million from its reinsurers. If there’s a claim totalling N12 million tomorrow, the company pays you the N12 million but recovers the balance of N2 million (which is above its retention limit) from its reinsurers. You don’t have to know about this arrangement because it is strictly between your insurance company and its own “insurers” (i.e. reinsurers)

That’s it in less than 200 words.

Very simple.