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I see what you mean. The idea is that a retreat should tempered with the fact that you are guaranteed the loss of that territory. That makes sense.

Hmm. so if the attacker just wants the territory and if the defender defends the attacker loses a max of 2. If the defender retreats the attacker loses a max of 0 Right?

I know but can the attacker retreat as usual? If so he loses a max of 2 as he can retreat.

Defensive retreat - as you have described it - is an interesting rule.  Without testing it, I can foresee it having a huge impact on strategy.  Essentially, this rule would enable a player to effect many de facto tactical moves instead of the one tactical move permitted under the official rules.  More importantly, I think that with the implementation of this rule, tactical management and grand strategy could be affected in a profound way.

Mobile Fronts

As for tactical management, I have found that strength stems from the concentration of force.  This is a situation that affords a player the luxury of an implied attack force while simultaneously defending a position.  Normally, a player can achieve a strong defensive position by amassing a large army at a chokepoint: Brazil, Indonesia, Greenland etc.  These chokepoints encourage the desire in players for capturing the continents of Australia, North America, and South America as part of grand strategy.  This leaves Europe, Asia, and Africa as typically harder to keep, for they have exposed borders that do not converge in chokepoints.  In this regard, the challenge in keeping these continents not only requires an awareness and anticipation of the opponents' strategic objectives, but also a thorough risk assessment of the distribution of force along a multi-territory border.  Within the context of tactical management, a conflict arises: the protection of gains does not reconcile with the concentration of force. 

I feel that defensive retreat would foster mobile fronts, which could bridge these conflicting tactical objectives.  Under the current rules, spreading force amongst companion territories along a multi-territorial border may invite attack; neither companion territory is as strong as it could be because force has not been concentrated.  Furthermore and perhaps more importantly, the elimination of the force in one of the companion territories results in the reduced capability of the other territory to counterattack.  However, the splitting of force becomes a necessary evil for protecting the gains that are held behind the frontlines.  By implementing the defensive retreat, a force split between two (or more) companion territories could combine into one large force, and this would enable a full-strength counterattack.  Thus, the defensive retreat permits the player to spread force to protect gains, while simultaneoulsy discouraging attack through the implied threat of concentration of force.

For example, Europe is exposed to large opposing concentrations of force in North Africa and Middle East.  Either of these two territories could launch attacks into two European territories.  North Africa could attack either Western Europe or Southern Europe, and Middle East could attack either Ukraine or Southern Europe.  Without defensive retreat, Europe would require an army strength of 2:1 to balance the forces probabilistically.  With defensive retreat, the army requirements would be significantly decreased.  For instance If North Africa has 10 army units, while both Western Europe and Southern Europe have 5 army units, how inviting is an attack?  Without defensive retreat, the attacker could expect to overwhelm the chosen defending territory with the loss of 4 to 5 army units and fortify North Africa with a tactical move.  This would leave the defender with 5 army units with which to plan a counterattack.  This would be a good trade for the attacker if it breaks a continental bonus.  With defensive retreat, the defender may decide to evacuate the army units to a companion territory to concentrate force, but the key to note is that the attacker does not have that information before initiating the attack.  If the attack is declared and the defender retreats, then the attacker will expose army units to a full-strength counterattack, or spend a tactical move to protect those army units.  The gain to the defender is obvious.  Without cost to any units on the board, the attacker was forced to commit to a strategic action that could weaken his or her own frontlines, (either in the immediate vicinity or in other areas of greater strategic importance), and the defending player would have a larger concentrated force on his or her turn to attack the weakness.  Of course, these retreats could go on and on between the players, but there is an important distinction to be made: in theory, the European player does not require as many army units to stave off attack with the implementation of defensive retreat.

Implications:

I think that Africa and Europe become much more viable as continents with regards to grand strategy.  With the reliance on diplomacy in achieving these continents being mitigated, the playability of Risk could improve, especially when there are more players.  The early grabbing of Australia and South America by players may not be nearly as vital;  instead, defensive retreat could enable the other players frozen out of these two continents to pin those players in.  Defensive retreat could improve and expand strategy.

However, this rule may not be all rosy.  Player elimination would become markedly more difficult, and this could make World Domination an extremely daunting task.  In time, economic advantage would enable a dominant player to be in a position to win, but the increased time that would be required for a troop build-up could be spoiled by the accumulation of cards by other players as they retreat and turn in sets.  As for Mission Risk, I definitely think that this rule warrants a try.

That was a great "academic" analysis Nanka. Yes, what you say is practically true and the need for more diplomacy can never be that bad

It's one of those rules changes that need to played many times over before anyone can get the hang of it especially against other experienced players.

After having thought about the implications of defensive retreat, I would suggest a change: I think that the timing of the retreat should occur after the roll of dice (and the resolution of casualties) - rather than before. 

If the retreat of army units is permitted before rolling, then there may be no cost in terms of casualties to army units.  Furthermore, there would be high incentive for allied powers to exchange territories for accumulating cards, and the "collapsing retreat" of weak army units back into chokepoints or larger concentrations of force would affect the likelihood of player elimination.

So, before rolling the dice, a player should decide whether it wants to make a defensive retreat.  If defensive retreat is optioned, then, when the dice are rolled, any casualties that the defender would inflict should be ignored i.e. the attacker cannot lose any army units*.  Optioning before the resolution of a battle would prevent the defending player from gaining the advantage of seeing how things turn out after each individual battle.  Furthermore, defensive retreat provides a significant defender advantage (in terms of strategic options), and for the purposes of gameplay balance, it should have a cost.

Summary of Suggested Changes to Battle

1. Attacker:  Declaration of attack
2. Defender:  Declaration of defense or defensive retreat
3. Roll dice
4. Remove casualties*
5. Defender:  Defensive Retreat of all surviving army units (if optioned)

Edit:

In order to effect a defensive retreat, the defending player must be able to roll two dice.  The reason for this amendment is to avoid the option of rolling only one die to minimize losses.  In addition, it would force players to commit to defensive retreats as an option by garrisoning extra army units.  The possibility of "collapsing retreat" for individual army units could be extremely detrimental with regard to player elimination.