Reinsurance retention ratio

The reinsurance retention ratio is:

net premium written ÷gross premium written

It is a rough measure of how much of the risk is being carried by an insurer rather than being passed to reinsurers.

What it measures directly is how much of the premium is retained rather than passed on, its use as a measure of risk carried assumes that premium is proportional to risk. This is a reasonable assumption, but not exact. Insurers and re-insurers have different costs, apart from covering risk, that need to be covered by premiums. In addition two different businesses need to have the same margin!

It may appear that thease factors are measured by the expense ratio claims the claims ratio, but these are historical measures of actual outcomes, whereas for a risk measure we want to measure the risk of future outcomes.

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