Retention limits

A nonlife insurer may either retain the risks that it takes on or cede a portion of such risks by way of reinsurance. The more risks the insurer retains, the riskier it becomes for the insurer. Section 221 of the Insurance Code imposes a limit on the maximum amount of risk (or business) the insurer may retain in its books. Beyond which it must reinsure. This is called the “retention limit.”

The retention limit represents the insurer’s own risk without reinsurance protection. It is also the point by which the insurer must cede the risks. The retention limit serves as a buffer against the occurrence of any catastrophic losses. On the other hand, low retention limits may lead to fronting, wherein the insurer will be ceding or transferring practically the entire risk to the reinsurer.

Note that, in the Philippines, there is no law requiring a minimum retention. This means that an insurer may cede 100 percent of the risks that it takes on. This also means that fronting is not illegal. In such a case, the “fronting insurer” merely receives a fronting fee.

Retention is defined as “the amount of risk that the reinsured [cedant] is willing to pay out of its own account for any policy, risk or group of risks. The portion of risk that is written and not ceded away to the reinsurer.” Generally, retention is a matter of choice for the insurer, there is no fixed standard mathematical formula. A conservative management would want to lower their risk exposure and so choose to have lower retention of risks. Section 221 merely sets the maximum limit of retention. Determining how much should be retained and reinsured has become a complex subject that companies have to undertake risk retention analysis applying
mathematical models.


How much should an insurer retain? Under Section 221, a nonlife company may only retain risks, determined on a per single risk basis, not exceeding 20 percent of its net worth. The law presumes that this is “how much of the said risk, the reinsured would be in position to pay out of its own account.” Beyond the amount exceeding 20 percent of its net worth, the insurer must mandatorily cede by reinsurance.

A nonlife insurance company doing business in the Philippines, whether foreign or domestic, may retain risks on any one subject of insurance in an amount not exceeding 20 percent of its net worth.

It will be observed that for very large risks, local insurers, with smaller net worth, end up retaining a minimal portion of said large risks as the retained capacities are soon exhausted. Reinsurance is, therefore, inevitable.

Retention limit for life insurers

The retention of a life insurance company on any one standard life insured, pursuant to CL 2014-42, shall not be less than the amount equal to one-half of 1 percent of the latest verified net worth of the ceding company.


Dennis B. Funa is the current insurance commissioner. Funa was appointed by President Duterte as the new insurance commissioner in December 2016. E-mail:


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