Obligatory Reinsurance

See: Reinsurance.

Some reinsurance agreements get made on a case-by-case basis. The ceding company (that is, the insurer hiring a reinsurance company) is only looking for reinsurance in a single specific situation.

Other arrangements are more far-reaching. These deals are often known as a reinsurance treaties. Under these agreements, the companies come to terms over a broad set of policies.

Obligatory insurance represents a potential stipulation in these larger treaty agreements. Basically, the reinsurance company agrees to take on all policies that fit into a pre-set series of criteria. Like, any policy of between $100,000 and $150,000 would immediately go to the reinsurance firm.

The reinsurer is then obligated to take these policies on. If the ceding company signs up a client who wants a policy valued at $110,000, the reinsurer doesn't have a choice. They have to accept it.

These stipulations are also sometimes called an "automatic treaty."