Other Than Life (OTL) Practice Exam

What does "retention" refer to in the context of insurance?

1. The amount of deductible to be paid by the insured

2. The amount of insurance which the insurer may decide to keep for its own account

3. The part of the insurance which the insurer may pass on to a re-insurer

4. The maximum amount of insurance the insurer can cover under any one policy

The correct answer is: The amount of insurance which the insurer may decide to keep for its own account

In the context of insurance, "retention" refers to the amount of insurance that the insurer chooses to keep on its own books, rather than transferring the risk to another party, such as a reinsurer. This encompasses the portion of risk that the insurer is willing to bear, reflecting an insurance company's risk management strategy and financial stability. By retaining a certain level of risk, insurers can benefit from the premiums associated with the retained portion while also ensuring they are not overly reliant on reinsurance. This concept is central to understanding how insurers balance their portfolios and manage potential losses. Retention plays a significant role in the calculation of premiums and the overall risk exposure of the insurance company. This understanding of retention is crucial for those studying insurance, as it impacts pricing, coverage decisions, and the insurer's approach to managing its risk portfolio.