The essence of obligatory reinsurance

Obligatory reinsurance is a form of treaty reinsurance in which the obligations are mutual: the insurer (the cedent) must cede every risk that falls within the treaty terms, and the reinsurer must accept it at the agreed share or within the limit. Neither party selects risks individually, which is why the treaty works automatically and does not require approval of each policy.

An obligatory treaty is a particular case of treaty reinsurance. For the reinsurer it means trust in the cedent's underwriting: it does not see each risk in advance but receives a balanced share of the portfolio, good risks and bad ones alike. For the insurer it means certainty that reinsurance protection applies from the first day of every policy.

Three forms: what is the difference

  • Obligatory. Both parties are bound. This protects the reinsurer from anti-selection: the cedent cannot cede only its worst risks.
  • Facultative-obligatory (fac-oblig). The cedent may choose which risks to cede, and the reinsurer must accept them. Convenient for the cedent but risky for the reinsurer, so such treaties cost more and are more tightly restricted.
  • Obligatory-facultative. The cedent must offer risks, and the reinsurer may decline. Rarely used.

When an obligatory treaty makes sense

  • The portfolio is homogeneous and large: homes and small businesses, motor, personal accident, voluntary health insurance (DMS).
  • The insurer needs predictable capacity to sell without waiting for approvals.
  • Capital is limited, and proportional cession reduces the burden on it.
  • A new insurer or a new line: an obligatory quota share lets it grow with the reinsurer's support.

Key terms

An obligatory treaty sets out the scope (classes, territory, exclusions), the maximum limit per risk, the cedent's retention, the reinsurer's share or layer, premium and commission, reporting (bordereaux or summary accounts), settlements, claims clauses and the reinsurer's right to inspect the cedent's records. Risks outside the treaty are ceded facultatively. The structure can be proportional or non-proportional.

Accounts and reporting

Because the reinsurer does not see the risks in advance, reporting is its main control tool. The cedent regularly, usually quarterly, sends bordereaux or summary accounts: written premiums, commission, paid and reported losses. The reinsurer is notified of large losses immediately and, if necessary, pays its share before the scheduled settlement date.

An obligatory treaty is not the same as the mandatory cession to RNRC

In Russia these two concepts are easy to confuse. An obligatory treaty is a voluntary agreement between an insurer and a reinsurer. The mandatory cession is a requirement of Law No. 4015-1 "On the Organization of Insurance Business in the Russian Federation": insurers must offer JSC Russian National Reinsurance Company (RNRC), whose sole shareholder is the Bank of Russia, a share of the risks they cede to reinsurance (50% of the ceded obligations as a general rule). In practice, RNRC's share is usually built directly into the insurer's obligatory treaties.

Practice since 2022

The exit of a large part of the Western reinsurers has reduced the obligatory capacity available. Russian insurers increasingly raise their retentions, build programs with RNRC and Russian reinsurers, and seek shares from reinsurers in countries that have not joined the sanctions. Transactions with counterparties from unfriendly states are restricted by special economic measures, so the jurisdiction and payment route of each participant are checked in advance.

What to consider

  • The cedent's underwriting guidelines written into the treaty: breaching them can lead to a dispute.
  • Claims clauses: notification deadlines, claims control, cash calls for large losses.
  • The attachment basis and portfolio transfer when the reinsurer changes.
  • Settlement currency and provisions for cases where payment is impossible.

How Polis Re helps

Polis Re specialists help assess which form, obligatory or facultative-obligatory, suits the portfolio, select reinsurers and reinsurance intermediaries, and support negotiations and placement. Definitions are in the insurance glossary. To discuss your needs, submit a request.