Risk retention
Risk · Cloudbreak team · Updated October 29, 2026 · 9 sources
Definition
Risk retention is the planned acceptance of some losses, through deductibles, self-insured retentions, deliberate noninsurance or loss-sensitive plans, where part of a risk is consciously kept rather than transferred to an insurer.
How it works
Every owner pays for losses in one of two ways: transfer, by buying insurance, or retention, by paying them from its own resources. Most programs mix the two. The owner keeps the small and frequent losses it can absorb and transfers the large ones it cannot.
Retained losses can be paid as current expenses, from a funded or unfunded loss reserve, by borrowing, or through an affiliated captive insurer. Retention is sometimes called self-insurance.1
The most common form is a deductible: the policyholder carries a set amount of each loss, and the insurer pays the rest up to the limit. A self-insured retention works much the same way, except the insured pays and handles its losses up to the retention before an excess layer of coverage responds.
Retention lowers premiums, since the insurer carries less. The cost is that retained losses stay with the owner: a year with a large storm can cost more than years of premium savings. A 2006 IRMI article says retained risk stays on the balance sheet, while premiums buy protection off it. A company that retains significant risk carries a capital charge whether or not it records one.2
How much an owner keeps reflects its risk tolerance, and IRMI cites a willingness to raise deductibles or self-insured retentions as evidence of it. Retention can also be imposed. Triple-I reported in April 2022 that after heavy storm losses, some insurers are requiring policyholders to take on more of each storm loss through deductibles.3,4
Example
Example inputs: a 240-unit apartment community has a total insurable value of $30,000,000. Raising its wind and hail deductible from 1% to 2% of that value cuts the annual premium by $45,000. Because a percentage deductible is a share of insured value, the owner's retention per storm rises from $300,000 to $600,000.5,1
In a year with no damaging storm, the owner keeps the $45,000. In a year with one $900,000 hail loss, the owner pays $600,000 instead of $300,000. That extra $300,000 equals 6.7 years of savings ($300,000 divided by $45,000).6
| 1% deductible | 2% deductible | |
|---|---|---|
| Retention per storm | $300,000 | $600,000 |
| Annual premium saving | None | $45,000 |
| Owner pays | $300,000 | $600,000 |
| Insurer pays | $600,000 | $300,000 |
- Kept by the owner (2% deductible)$600,000
- Paid by the insurer$300,000
- Total$900,000
A 2006 IRMI example prices the whole tradeoff. On a $10 million standard premium, retaining risk cut the premium by $6 million, the expected losses. After a 35% federal income tax benefit and $300,000 of investment income on the retained losses, the cost of risk came to $8.3 million.2
| Step | Amount |
|---|---|
| Pre-tax standard premium | $10,000,000 |
| Premium reduction for retained risk (expected losses) | minus $6,000,000 |
| Pre-tax premium (insurer expenses) | $4,000,000 |
| 35% federal income tax benefit (2006 rate) | minus $1,400,000 |
| After-tax premium | $2,600,000 |
| Cost of retained risk (expected losses) | plus $6,000,000 |
| Investment income on retained losses | minus $300,000 |
| Cost of risk | $8,300,000 |
Where you'll see it
- Declarations pages: each deductible, including percentage wind and hail or named storm deductibles, is retained risk.
- Excess and umbrella policies: a self-insured retention the insured pays before the policy responds.
- Captive insurers and loss-sensitive programs, where the owner's own losses drive what it pays.
Lender rules cap deductibles. Fannie Mae's Multifamily Guide (effective October 26, 2026) sets maximum deductibles for properties securing its multifamily loans:7
| Peril or policy | Maximum deductible |
|---|---|
| Wind and hail (not a catastrophic peril) | 5% of total insurable value, or as a dollar amount $50,000 (under $10 million of insurable value) or $100,000 ($10 million or more) |
| Named storm and earthquake | 7.5% of total insurable value, or the same dollar amounts |
| All other perils, specific limit | $50,000 per occurrence (under $10 million) or $100,000 ($10 million or more) |
| All other perils, blanket limit | $250,000 per occurrence |
- Higher retentions: for expanded deductibles, Fannie Mae requires the borrower to show liquid assets of at least 4 times the deductible. Aggregate deductibles must be fully funded and held in a segregated account, in the lender's escrow or by a third party.7
Questions
- What is an example of risk retention?
- A deductible is the most common one. In the IAA Risk Book's example, an organization buys fire insurance and retains the first $50,000 of each fire loss, which lowers its premium compared with no deductible or a lower one.1
- Is risk retention the same as self-insurance?
- The terms overlap. The IAA Risk Book notes retention is sometimes called self-insurance.1
- What is the difference between risk retention and a risk retention group?
- Risk retention is keeping part of one's own losses. A risk retention group is a member-owned liability insurance company formed under state law and the federal Liability Risk Retention Act of 1986, in which every insured is an owner.8,9
- How do companies choose a retention level?
- A 2006 IRMI article says many companies retain by convention, such as $250,000 per occurrence, at amounts insurers price ($100,000, $250,000 or $500,000). It suggests comparing options by internal rate of return against the weighted average cost of capital.2
Cloudbreak
Cloudbreak keeps every policy, statement of values and loss run in one place per property, tracks renewals, and watches every building against storms with its proprietary predictive storm engine, built with AI and backed by meteorologists.
Sources
Written by the Cloudbreak team. Numbers, dates and rules cite the published sources below.
- 1. International Actuarial Association (IAA): IAA Risk Book: Non-Life Perils and Coverages (May 2023)
- 2. International Risk Management Institute (IRMI): Determining the Optimal Combination of Risk Retention and Risk Transfer (December 1, 2006)
- 3. International Risk Management Institute (IRMI): risk tolerance
- 4. Insurance Information Institute (Triple-I): Convective Storms: State of the Risk (April 2022)
- 5. Insurance Information Institute (Triple-I): Background on: Hurricane and windstorm deductibles
- 6. Federal Emergency Management Agency (FEMA): FP 206-086-1 Public Assistance Policy on Insurance (June 29, 2015)
- 7. Fannie Mae: Multifamily Selling and Servicing Guide, Section 501.02 Property Insurance (effective October 26, 2026)
- 8. International Risk Management Institute (IRMI): risk retention
- 9. National Association of Insurance Commissioners (NAIC): Insurance Topics: Risk Retention Groups