Warranty of Retention
The warranty of retention guarantees that the cedent actually retains the agreed net retention for its own account, unreduced, throughout the life of the treaty.
- Clause type
- Warranty
- Origin/Market
- Reinsurance market
- Favours
- Insurer
- Negotiability
- Market standard
Purpose
Pricing an excess of loss treaty assumes that the cedent actually retains the agreed level of net retention and does not effectively reduce it through further reinsurance not disclosed to the reinsurer. The warranty of retention turns this assumption into a strict contractual warranty, not merely a general expectation.
Effect and limits
As a warranty in the technical sense, a breach – unlike a mere condition – typically results in an automatic or at least significantly stricter loss of cover, regardless of whether the breach contributed to the loss. Jurisdictions treat the legal consequences of warranties with varying degrees of strictness; the exact wording determines whether a cure is possible.
Negotiation and practice
Cedents often try to soften the strict warranty into a milder condition or a de-minimis clause (small, unintentional deviations remain harmless). Reinsurers on high, concentrated cat XL layers frequently insist on the strict version, since the retention directly determines the reinsurer’s assumption of risk.