An Analysis of Life Insurer Retention Limits

This study examines the relationship between ceding life insurers' retention limits on an insured life basis and certain operational and financial characteristics of the companies. Analysis is performed using 97 major U.S. insurers with 1987 assets ranging from 108 million to 32 billion. Retention limits for these insurers vary from 25,000 to 20,000,000 per insured life. Five factors are shown to have the greatest impact on life insurer retention limits. Not unexpectedly, firm size is found to be the most important factor. Four other explanatory factors, each statistically significant at the 0.01 level, provide important additional insight into this relationship. These factors are (1) form of insurer organization (i.e., mutual or stock), (2) the firm's emphasis on new business, (3) average policy size, and (4) the company's emphasis on term insurance. Collectively, the principal components regression model explains nearly 90 percent of the total variation in retention limits for the sample insurers.