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📋 '''Facultative obligatory treaty''' is a hybrid [[Definition:Reinsurance | reinsurance]] arrangement that combines elements of both [[Definition:Facultative reinsurance | facultative]] and [[Definition:Treaty reinsurance | treaty]] structures. Under this type of contract, the [[Definition:Cedant | ceding insurer]] has the option — but not the obligation — to cede individual risks to the [[Definition:Reinsurer | reinsurer]], while the reinsurer is obligated to accept any risk that the cedant chooses to cede, provided it falls within the pre-agreed parameters of the treaty. This asymmetry — optional for the cedant, mandatory for the reinsurer — distinguishes the facultative obligatory treaty from both a pure [[Definition:Obligatory treaty | obligatory treaty]] (where both parties are bound) and a pure [[Definition:Facultative reinsurance | facultative placement]] (where both parties negotiate each risk individually).

⚙️ The treaty defines the eligible classes of business, geographic territories, maximum [[Definition:Sum insured | sums insured]], and other criteria that a risk must satisfy to qualify for cession. Within those boundaries, the cedant exercises discretion over which risks to retain on its own [[Definition:Net retention | net account]] and which to pass to the reinsurer. This arrangement gives the ceding company flexibility to manage its [[Definition:Aggregation risk | accumulations]] and portfolio shape while retaining access to guaranteed capacity for risks that fit the treaty's scope. [[Definition:Premium | Premium]] is typically calculated on a risk-by-risk basis as each cession is made, and the reinsurer receives periodic [[Definition:Bordereaux | bordereaux]] detailing the ceded portfolio. The reinsurer's exposure is usually capped by an [[Definition:Aggregate limit | aggregate limit]] or maximum cession amount to prevent the treaty from absorbing an unbounded volume of risk.

💡 From the reinsurer's perspective, a facultative obligatory treaty carries a distinctive risk: [[Definition:Adverse selection | adverse selection]]. Because the cedant chooses which risks to cede, there is an inherent incentive to retain favorable exposures and pass along those perceived as less attractive — a dynamic that reinsurers price for explicitly. Sophisticated reinsurers mitigate this concern through careful cedant due diligence, tight treaty definitions, and ongoing monitoring of the ceded portfolio's [[Definition:Loss ratio | loss experience]]. For the cedant, the structure is valuable precisely because it offers pre-arranged capacity without the administrative burden of negotiating individual [[Definition:Facultative reinsurance | facultative placements]] for each qualifying risk, while preserving the freedom not to cede risks when its own [[Definition:Retention | retention]] appetite allows. Facultative obligatory treaties are commonly used in specialty lines — such as [[Definition:Marine insurance | marine]], [[Definition:Aviation insurance | aviation]], and [[Definition:Engineering insurance | engineering]] — where risk characteristics vary widely and selective cession adds genuine portfolio management value.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Facultative reinsurance]]
* [[Definition:Treaty reinsurance]]
* [[Definition:Obligatory treaty]]
* [[Definition:Adverse selection]]
* [[Definition:Cedant]]
* [[Definition:Net retention]]
{{Div col end}}

Definition:Facultative obligatory treaty - Revision history

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