What happens to the remaining amount of risk not ceded in a reinsurance agreement?

In a reinsurance agreement, the portion of the risk that is not ceded, meaning that the primary insurer retains it rather than transferring it to the reinsurer, remains with the ceding company. This retained risk represents the amount that the ceding company chooses to keep on its balance sheet.

This strategy can be a part of the insurer's risk management approach, allowing it to maintain control over certain exposures and preventing total dependence on the reinsurer. The ceded risk is transferred to the reinsurer for coverage, while the ceding company still holds responsibility for the remaining amount. This retained risk can lead to a greater potential for profit or loss, depending on the claims experience of the policies that remain with the primary insurer.

Understanding this dynamic is essential for assessing the financial health and risk appetite of an insurance company, as it illustrates the balance insurers must strike between leveraging reinsurance to mitigate risk and retaining enough risk to remain profitable.