Underlying Retention is a risk management tool that enables insurers to limit their reinsurance costs by retaining portions of policy liabilities for lower-risk components. Whereas most reinsurance premiums are paid proportional to the total liability of the ceding company, underlying retention allows insurers to make decisions based on individual risks, instead of the entire liability. In other words, insurers can analyze which policies are most beneficial to keep within their own portfolios and which policies may be more cost-effective to reinsure.

The primary benefit of underlying retention is that it allows insurers to take advantage of the greater return on investment when they independently manage higher-risk policies. In addition to higher returns, insurers may also gain greater access to valuable policy data, which can be used to make better decisions with respect to risk management and pricing. Furthermore, underlying retention provides more flexibility in terms of handling increased risks, such as those resulting from an increase in underlying liabilities or an exponential rise in catastrophe costs.

To utilize underlying retention, insurers must first identify policies that are both worthy of retaining and covered by regulation. Ceding companies must also consider their own underwriting capacity when assessing their underlying retention strategy. This is because insurers often have limited resources, meaning that the total liability of their underlying retention cannot exceed their expected total underwriting capacity. Furthermore, insurers must carefully consider their reinsurance limits when selecting policies for underlying retention.

In conclusion, underlying retention is an effective risk management tool that allows insurers to retain lower-risk components and reduce costs associated with reinsurance premiums. Although some insurers lack the resources to capitalize on the full benefits of underlying retention, those who can assess their own underwriting capacity and reinsurance limits are well-positioned to benefit from the increased returns and data flexibility that underlying retention offers.