CandleFocus Glossary Editor
Obligatory Reinsurance (also known as compulsory reinsurance) is a type of reinsurance contract that is legally required on certain flows of insurance business. Through obligatory reinsurance, reinsurers absorb much of the risk for primary insurers. Obligatory reinsurance is commonly used for life and health policies, in which the large pool of policyholders entails a higher amount of risk for primary insurers. By ceding that risk to reinsurers, primary insurers can remain financially stable and maintain an acceptable level of risk.
Obligatory reinsurance requires primary insurers to transfer some portion of their risks to a reinsurer; the primary insurer can choose the insurer but the requirement remains. The percentage of risk or loss to be ceded typically depends on the size of the insurance pool and the type of policy, but most obligatory reinsurance contracts are non-negotiable and require primary insurers to maintain a predetermined level of reinsurance coverage.
In the case of life and health policies, obligatory reinsurance is typically offered through “risk-layered” reinsurance contracts, which enable primary insurers to spread their risk among reinsurers. In this model, each reinsurer agrees to cover a certain portion of risks, allowing the primary insurer to share their risk with several reinsurers without assuming too much risk. The risk is also diversified among an array of policies and policyholders, which reduces the overall risk for the insurer.
By spreading the risk and reducing the burden of uninsured claims, obligatory reinsurance ensures that insurers remain solvent. This helps maintain the stability of the insurance industry and allows those seeking insurance protection to find the best coverage at a reasonable cost.
Obligatory reinsurance is a crucial component of protecting the insurance industry from large, unexpected losses. By ceding a large portion of risk to reinsurers, obligatory reinsurance keeps primary insurers financially stable even in the face of very large claims. The diversified risk-layered approach to obligatory reinsurance also ensures that primary insurers maintain an acceptable level of risk while still protecting their customers from the liability of uninsured claims.
Obligatory reinsurance requires primary insurers to transfer some portion of their risks to a reinsurer; the primary insurer can choose the insurer but the requirement remains. The percentage of risk or loss to be ceded typically depends on the size of the insurance pool and the type of policy, but most obligatory reinsurance contracts are non-negotiable and require primary insurers to maintain a predetermined level of reinsurance coverage.
In the case of life and health policies, obligatory reinsurance is typically offered through “risk-layered” reinsurance contracts, which enable primary insurers to spread their risk among reinsurers. In this model, each reinsurer agrees to cover a certain portion of risks, allowing the primary insurer to share their risk with several reinsurers without assuming too much risk. The risk is also diversified among an array of policies and policyholders, which reduces the overall risk for the insurer.
By spreading the risk and reducing the burden of uninsured claims, obligatory reinsurance ensures that insurers remain solvent. This helps maintain the stability of the insurance industry and allows those seeking insurance protection to find the best coverage at a reasonable cost.
Obligatory reinsurance is a crucial component of protecting the insurance industry from large, unexpected losses. By ceding a large portion of risk to reinsurers, obligatory reinsurance keeps primary insurers financially stable even in the face of very large claims. The diversified risk-layered approach to obligatory reinsurance also ensures that primary insurers maintain an acceptable level of risk while still protecting their customers from the liability of uninsured claims.